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Friday, November 1, 2013

The Importance of Corporate Formalities

Small business owners face many challenges, such as finding financing and the right employees, not to mention bringing in new business. As a business law attorney I often advise clients on another important issue—avoiding liability for lawsuits, especially personal liability. A business owner should always use a structure such a limited liability company (LLC) or corporation for his or her business. This structure cannot prevent against all personal liability, because sometimes you are going to have to sign personally, such as when you take out a loan for your business. But if properly documented and maintained, a corporation or LLC can help avoid personal liability in many situations.

I would recommend first talking to your tax advisor, most likely your accountant, before getting started. Depending on the kind of business there may be certain advantages to choosing one type of entity over another. Then I would suggest you hire an attorney to set up your new business. Yes, you can probably do it cheaper online, but only an attorney can ensure that you and your business are properly protected. You should be able to obtain a quote for the fee up front. In addition, online companies will often charge you high annual fees for a statutory agent and other services which you often do not need. In addition, if there is more than one owner in the business, your attorney can help you to document your agreements concerning the ownership and management of the business.

Once your business is up and running, it is important that you not forget about the formalities that are required. The documentation for a small business is not burdensome, but it is important. Make sure you file your annual reports with the secretary of state. Keep all of your corporate records in a secure location and where you can easily find them. And I also recommend having an annual meeting of the business and keeping notes of the meeting with the records.

But by far the most important practice is to keep your business and personal finances separate. If you need to infuse your business with some cash, then by all means do so. Your accountant can advise you on how best to do this. But other than that, keep finances separate. Do not commingle personal and business funds. Business expenses should be paid from the business account, and personal expenses should be paid from your personal account. Do not use your business to pay your personal expenses.

Courts, including Connecticut courts, will generally recognize the liability protection provided by corporations and LLC’s. But if they view the business as a fraud or sham, they will not hesitate to hold the business owner(s) liable for obligations of the business. This is called piercing the corporate veil. The best way to protect your business and yourself is to consult with an attorney and maintain your business as a distinct entity.




The Law Office of Thomas J. Dufour, LLC assist clients throughout Connecticut including New Haven, Milford, Waterbury, Bridgeport, Shelton, Branford and Hartford.


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