- Don’t Pay Personal Expenses From The Corporate Account. Keep your business accounts separate from your home accounts. Don’t commingle assets. Using the corporation as your “personal piggy bank” is the first step to becoming vulnerable to a creditor “piercing the veil” of your corporate or LLC protection. Pay yourself a reasonable salary or draw; then pay for your personal expenses.
- Use the Entity’s Name, and Your Title There. Don’t sign anything in your personal capacity (“John Smith”). Instead, sign it in your corporate capacity (“Smith, Inc., by John Smith, President” or “Smith, LLC, by John Smith, Manager/Member”). We successfully sued two guys and the court held them individually liable because none of their paperwork indicated that they were acting on behalf of a corporation. Don’t be them.
- Maintain Legal Formalities. If you incorporate, draft (or have an attorney draft) documents to show that you held annual shareholder and board of director meetings in which you re-elected yourself as a director and re-appointed yourself as an officer. Not so crucial with a one-owner company, but very important with two or more. If you form an LLC — which does not have to have annual meetings — make sure you have and sign an operating agreement.
- Plan for an Endgame. An LLC’s operating agreement and a corporation’s shareholders agreement should provide for what happens if things don’t work out with your partners. Or one of you decides to do leave the company. Or dies. None of which you want to think about before the honeymoon, but all of which are easier to deal with when everyone likes each other.
- Publish or Perish. An LLC that’s located or otherwise doing business in New York — even if the LLC is formed in another state — needs to publish a notice of the LLC’s formation in two newspapers (yes, in print!) once a week for six weeks. Failure to do so can prevent the LLC from bringing a lawsuit or from being sued — so, theoretically, you’re exposed in your personal capacity. Even worse: after 6 months from formation, the state is allowed to dissolve a LLC that fails to publish. So, arrange for publication and filing of an affidavit with the state authority.
- You Can Run But You Can’t Hide. Whether you formed an LLC or a corporation, the Secretary of State is your company’s agent for service of process, and they mail you any summons and complaint they receive to an address where you actually receive mail (yes, regular mail!). So if someone sues the company, and you haven’t kept your address current, you might not know about the lawsuit until it’s over, and a default judgment has been lodged against your LLC or corporation.
- Protect Your Name. “Reserving” or otherwise registering your name with the Secretary of State does not protect your brand. It just means that there is no one else, in that state, with that exact corporate name. If your business name is important to your success, register it (or have an attorney register it) as a trademark or service mark with the federal government.
- Keep Your Records Current. “Partners” (that is, shareholders or LLC members) may come and go, directors may resign, officers may get fired. Draft and sign off on resolutions or consents that reflect who is in charge and who has authority to sign documents or maintain bank accounts. If you don’t, you may be surprised by an unauthorized person acting as if they are still authorized.
- Keep It to Yourself. You don’t want your employees or independent contractors to claim that they didn’t know any better. Give them agreements to sign, so that they keep your business secrets confidential, not take your customers, and assign the intellectual property that they create for the company. Otherwise, you might be surprised by what walks out the door with that disgruntled employee.
- Don’t Be a Stranger. If you get a letter from a lawyer, then call a lawyer. Simply responding on your own, and “honestly”, at first may seem less expensive than getting an attorney involved. But it may be a lot more expensive if you give away information that turns out to be more harmful than helpful. Even if it’s not a criminal matter, “what you say can and will be used against you in a court of law.” The difference is that in a civil law context, they don’t have to read you your rights before getting a confession from you.
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