Setting up your business with a legal entity separate from yourself is incredibly important for liability protection. By taking the steps to file with the state to create this entity but simply because the government gave you a little piece of paper does not mean your protection is guaranteed.
You see, the government wants us to “earn” this limited liability protection and sets the bar for us business owners. Whether you’ve smartly created a limited liability company or corporation, there are more steps for you.
This article outlines four-simple steps to institute in your workflows to maintain that shield of protection around you.
Operating Agreement + ByLaws
The biggest danger that I see in many small business owners who go and try to self-file for LLC or Corp is failing to realize that many states require an operating agreement (LLC), or bylaws (CORP) to either be filed with the state or kept on file in your principle place of business. The state does not provide these business management documents and should be drafted by a lawyer. Even if a state does not require these, it is best practice for all small businesses to have them executed, even if you’re a solo business owner.
Remember, we never have an issue until we have an issue.
Should the time come, this document can help to assist your lawyer to keep your limited liability protection intact. This is a small financial and administrative step to keeping your business assets separate and personal assets protected.
Sign Contracts Properly
Once you have set up an entity separate from yourself, every single one of your business dealings should connected to this entity. Think of it like you’re physically wanting to put all your business dealings into your business bucket. You administratively do this by signing all of your contracts in the name of the entity. Example: You as the manager (owner) of the LLC are signing a services contract with a client. The parties to the contract should be your client and your LLC name. When you go to sign the services contract you should sign your legal name FOR the LLC.
Remember, in order to have limited liability protection we want to have all business dealings in the business bucket. If you sign the contract simply by your name, this could be called into question when theres an issue and potential for the client to reach into your personal asset bucket.
Maintaining The Protection
Again, the government wants us to work for our protection. Just like the required documents and contract execution, you want to avoid what is called “piercing the corporate veil”.
Here is a quick list to avoid piercing and having your personal assets touched:
- committing fraud, wrongdoing or injustice
- failing to follow corporate formalities (see the contract example above)
- co-mingling personal and business funds in bank accounts
- paying for personal items or bills from your business account
This list is not a be-all and end-all but it is a good starting point for you, the head of your business, to put on the CEO hat and start developing a plan to set up yourself legally and to maintain your legal protection.
If you’d like to by-pass cobbling together the legal stuff through articles and get the step-by-step delivered to you enroll in Real Legal – my legal workshop that walks you step-by-step through entity formation, taxes, trademark, copyright and more!