So a little while back you decided to start a company. You were excited and ready to take on the world. In these formative moments everyone told you, “You need to incorporate to make sure blood sucking plaintiff’s lawyers can’t get your house.” So, in light of the vampire-like consequences of doing nothing, you went ahead and filled out the one-page “Articles of Incorporation” form with the Secretary of State’s Office, ponied up the $100 filing fee, and BAM! – You are now own a corporate entity.
Hmmm. Now what? Seinfeld re-runs, maybe?
Chances are you did exactly what you would have done anyway. You went forward with your business plan. You opened a checking account, ordered some business cards, put together a website, and started making money. But sitting there, quietly and without any notice, in your file cabinet rested your Article of Incorporation, patiently biding its time until you would look for it again. Grinning silently to itself with the expectation that one day in the future, Articles (and its best friend “By Laws”) would become the single most loved or hated pieces of paper in your life.
Now that I set the stage for a DRAMATIC CONCLUSION (you’ll have to read the rest of the blog to find out how this story ends), let’s get quickly and painlessly to the point: A corporate shield is only effective in protecting your personal assets if maintain it. There are essentially three basic ways a blood sucking lawyer can go around the corporate shield and get you personally:
(1) COMINGLING FUNDS/PROPERTY. What this means is that you bought Dominos Pizza for the family last Friday with a company check. Or maybe you bought a Handycam for vacation last summer (because it was such a good deal and you just had to have it) and the company paid for it. In sum, you mixed the company funds with your own and it soon becomes difficult to see where one starts and the other end.
(2) UNDER FUNDED. What this means is that the company’s assets are disproportionately small for the nature of the business and the risks of doing this sort of business. Typically you will see this when the owner(s) of the company immediately drain the company accounts, through salaries or distributions, as soon as there is cash in the account. This is what some call a “sham” or a “shell” company.
(3) FAILURE TO FOLLOW FORMALITIES: What this means is that you haven’t forgotten about what is lurking in the file cabinet. There are certain legal formalities that are required under the law that must be followed for your company to be legitimate.
And now, for the DRAMATIC CONCLUSION . . .
There is not dramatic conclusion. And that it the way you want it.