How to protect your personal assets from your business liability - five keys.

Five key steps to keep your business separate and protect you personally.

If your business has its legal planning in place – your personal assets will most likely be protected from any liability that might occur as a result of your business operations.   Following the five key guidelines below will help to create and maintain your business as a separate entity- protecting your family, home, and other personal assets from being “up for grabs“ should someone sue your business.

A properly formed business in Colorado is legally created and regulated by state laws and thus legally separate from the individuals who own them. To retain this separation, certain legal requirements and formalities regarding the maintenance and operation of the business must be followed. If these requirements are not met, the separation may be disregarded, with disastrous consequences.

The following is a brief summary of some of the benefits of having a properly formed legal entity for your business, no matter how large or small it is:

• Protection of Limited Liability:  If you treat your business as an entity, separate from yourself, it is highly unlikely that the business entity will be disregarded by a court or government agency like the IRS. If it were disregarded, the result could be financially devastating. If the business entity cannot pay its debts, whether from regular operations or from liability attaching as a result of lawsuit or government action, your personal assets would be made available to the creditors of the business entity.
• Continual / Perpetual Existence: If businesses are properly planned for the death or disability of the owner does not mean that the business is dissolved (in the case of death) or unable to conduct business (in the case of disability). Changes in ownership and management are specifically addressed in the by-laws of corporations, in the operating agreements of LLCs, and in the partnership agreements of LPs.
• Access to capital: A business entity is a more attractive vehicle for investors than a sole proprietorship. Private investors are able to invest in business entities with confidence. This confidence comes from being able to invest and receive either a debt obligation (which may be convertible into equity under certain circumstances) or a portion of the ownership of the entity.
• Potential tax benefits: The owners of corporations and LLCs taxed as corporations may be able to receive tax benefits by sheltering business income in the entity—thus reducing the owners’ overall tax liability.
• Commercial credibility: American consumers are more accustomed to purchasing goods and services from businesses than sole proprietors. This instant reputability is another leading reason individuals use a legally separate entity as the business vehicle of choice.
• Employee benefits: Under certain circumstances, the ability to offer more comprehensive and deductible fringe benefits may result from the use of a business entity.

THE CHALLENGE
All too often, the requirements of just keeping a small business running leave little time for the owner or owners to engage in corporate/LLC/LP “housekeeping” and “maintenance.” Without some level of diligence on the part of the owners, a gradual merger of the life of the business and the life of one or more of the owners or managers may begin. When this happens, the separate legal status of the business entity begins to fade.

WHAT YOU NEED TO DO TO PROTECT YOURSELF AND YOUR BUSINESS
The following  five key steps should be taken by all business entities, even those owned and managed by only one person.

1.  Compliance with the Secretary of State:

As an initial matter, you should ensure that your business entity is in good standing at all times with the Colorado Secretary of State. You will receive an annual report from the Colorado Secretary of State each year (for entities other than Limited Partnerships). It is important that you complete and return this annual report with the required fee. Even if your entity is delinquent in annual filings or other matters, it is usually very easy to bring your entity into compliance with the Secretary of State. Typically, this will involve the filing of a delinquent annual statement or, possibly, reinstating your entity if it has been deemed dormant or inactive.

2.  Internal Governance in Compliance with State Law:

It is important to keep your internal entity governance up to date. This step can not be over emphasized in its importance. Being in good standing with the Secretary of State is only the initial step in having your business entity recognized as separate from you (as the owner) at some future time whether in court or by a government agency.

3.  Corporate Book
The most important action item is to ensure that your business document binder remains up to date. (This binder is universally referred to as the “Corporate Book” irrespective of whether you own a corporation, LLC or LP.) The binder should contain your entity’s organizing documents (articles of incorporation or articles of organization), the operating documents (by-laws, operating agreement, or partnership agreement), evidence of ownership (signed stock certificates, membership certificates, or partnership certificates), transfer ledgers, resolutions and agreements to extraordinary actions (opening bank accounts, signing a lease, making tax decisions, appointing officers, etc.), minutes of each annual meeting (discussed further below), tax documents (such as the Request for Employer Identification Number on Form SS-4 [the tax identification number for domestic business entities], S-Corporation Election on Form 2553, Tax Returns on the applicable forms [1065, 1120, 1120-S, etc.]), required permits and licenses for your type of business, leases, loan documents, and any other documentation that is evidence of your respect for the separation of the business entity from yourself.

4.  Annual Meeting

Reviewing the actions of the entity and planning for any upcoming changes on an annual basis is important. The documentation of this annual review/meeting in the Corporate Book is one of the first items a future judge will review if ever asked to disregard your entity.

5.  Keeping It Separate - Day to Day

You should also make sure the following tasks are accomplished and used in the daily running of your company:

• Open a bank account (usually a checking account) in the name of your entity.
• Ensure that you can document all moneys put into your entity in return for your ownership.
• In any interactions your entity has with other commercial enterprises or individuals, make certain that it is clear that you are acting on behalf of your entity and not as an individual.
• Use letterhead on all of your correspondence and contracts.
• Include the entity designation (“Inc.,” “Limited,” “Ltd.,” “LLC”) whenever possible on business identifiers such as business cards, advertisements, etc.
• Always sign documents in your representative capacity, and not as an individual:

YOUR ENTITY NAME

______________________________________________
by: YOUR NAME, YOUR TITLE (Manger, President, Owner, etc.)

• Ensure that all assets that are meant to be owned by your company are titled in the name of your entity and not in your name personally.
• Never commingle the funds or assets of your entity with your personal funds and assets. If you need to fund the operations of your company with your personal assets, document the transfer as either a loan or a contribution to the capital of your entity. If you need to use assets of the company for personal reasons, distribute the assets out of the company to yourself first as income, profit distributions, or a return of your capital contribution.

Clients who are successful entrepreneurs - some characteristics

Entrepreneurs are a special kind to be admired and learned from.

What are the characteristics of successful entrepreneurs?  I love representing clients who are starting a new business venture. It’s always exciting to hear about their vision and plans to implement it and I am always happy to walk them through the legal requirements of this process so that they have the proper structure and building blocks to make it happen.  After fifteen plus years working with clients pursuing their dreams of creating a successful business venture, I have developed a sense of characteristics that are helpful to start and run a business.

1.  Passion and Energy

My most successful clients are busy people; they possess the capacity to work long hours and don’t seem to ever tire of putting time into their business because they are passionate about creating and building it.

“You know you are on the road to success if you would do your job and not get paid for it.” – Oprah Winfrey

2.  Ability to take Responsibility

My most successful entrepreneur clients take responsibility for their actions and decisions even in the face of failure. They don’t blame their employees  or anyone else; instead they take charge, correct their business mistakes and move on.

“Sometimes when you innovate, you make mistakes. It’s best to admit them quickly and get on with improving your other innovations.” – Steve Jobs

3.  Confidence

My most successful clients are confident in their ability and their vision to make it happen. Whatever their relationship is with trust and or faith, they also strongly believe in themselves and their ability to achieve their goals.

4.  Persistence

“When the going gets tough, the tough gets going.” My most successful clients persevere without letting obstacles or unexpected failures slow them down – they reboot quickly and carry on.

“Nothing in the world can take the place of persistence. Nothing is more common than unsuccessful men with talent. The world is full with educated derelicts. Persistence and determination alone are omnipotent.” – Ray Kroc

5.  Goal Setting

My most successful clients have the ability to set clear goals for themselves and continue to map out their achievements against these goals and set new goals as their business matures – some of my most successful clients set daily, weekly, monthly, and yearly goals. One question I always ask, even as we are just setting the legal structure in place to create the business is- how do you see this business in five years time?

6.  Ability to take Risk

As we all know, business is a risk and to undertake it, you have to be daring. Successful entrepreneurs are risk takers; they gamble their time, energy and resources in pursuit of their vision and goals.

“You must take risks, both with your own money or with borrowed money. Risk taking is essential to business growth.” – J. Paul Getty

  7.  Intelligent Use of Feedback

My most successful client entrepreneurs take feedback seriously. They surround themselves with smart teams and solicit and listen to customer’s feedback – always seeking to improve.

“Sometimes, I think my most important job as a CEO is to listen for bad news. If you don’t act on it, your people will eventually stop bringing bad news to your attention and that is the beginning of the end.” – Bill Gates

8.  Integrity

“It takes 20 years to build a reputation and only five Minutes to ruin it. If you think about that, you will do things differently.” – Warren Buffett

My most successful entrepreneurial clients have thought about and set out principles that they do not compromise.  They hold themselves and their employees to these principles and they have usually integrated them into their company – and this integrity permeates their business - from their initial vision through to their back door (so to speak).

“Real integrity is doing the right thing, knowing that nobody’s going to know if you did it or not.” – Oprah Winfrey

1. Intelligent Use of Resources

Sometimes, entrepreneurs are faced with the challenge of building a business with limited capital or other resources including personnel and space. When building a small business startup from scratch, there is a need for efficient use of limited resoures - and my most successful clients seem to thrive making things happen on a shoe string budget. Clients who track and manage their budget and other resources always seem to do well.

10.  Treat People Well

My most successful clients are a joy to work with – their employees are happy to work for them and their customers are pleased with the service they receive from the company. – "Do onto others as you would have them do onto you ..." – actually works.

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 I saw this when I was looking for an illustration for this blog post and so thought to add it here - it is always a joy to work with my entrepreneurial clients - energizing and inspiring so - here is to you:  

If you have questions about a business idea that you are exploring my initial consultations are complimentary - and its always good (easier ) to start off with a solid legal foundation - so don't hesitate to contact me for an appointment or teleconference.  Click here for my complimentary Legal Guide to starting a business.