The use of corporations or limited liability companies (LLC) for businesses or rental properties is a prudent way to protect the owners' assets from debts or liabilities associated with the commercial venture. When properly formed, the corporation or LLC is viewed by the law as a completely separate legal entity. The so-called "corporate veil" is erected between the owners and their business or investment enterprise and provides complete personal immunity from liability for financial obligation or liabilities of the business.
However, this corporate veil can be pierced if the owners fail to carry out their required legal formalities to keep their individual finances separate from the business entity. There have been instances where courts have allowed the individual officers, directors and owners to be sued for obligations of the company. This can occur if it is determined that the business is merely the "alter ego" of the owners and not truly a separate entity.
There are simple steps which should be taken to make sure that your corporation or LLC provides continuous asset protection and cannot be pierced in a lawsuit. The primary requirement is to keep the company's funds separate from the individuals'. Of course, salaries, profits and expenses can be distributed from the entity to the owners and others. However, any commingling of funds, such as the payment of personal debts with company money or using company credit cards to pay personal expenditures, can be used in court as a basis to nullify the corporate shield.
It is also necessary to ensure that the initial formation documents are completely prepared, including bylaws for a corporation and an operating agreement for an LLC. Annual meetings and annual state filings must also take place. In order to obtain and keep the asset-protection provided by a corporation or LLC, consult with an experienced attorney.
Bruce L. Woodbury is an attorney with the law firm of Jolley Urga Woodbury & Little. The firm has offices in Boulder City and Las Vegas. To contact Bruce, call him at 293-3674 or 699-7500, or visit his website at www.juww.com.