In order for an entity to provide the protection for which it was intended, a number of things must be in order. There is a significant difference between setting up a corporation or LLC and surviving attack. Most people have heard of a corporate veil being pierced. This “piercing” means a creditor or plaintiff was successful in attacking the personal assets of shareholders, officers, and members of an LLC.
Unfortunately, this happens far too often and is avoidable. In my practice, I frequently come across entities that have holes in their armor. There are several reasons these holes exist. Sometimes people create their own entity online or use an online service where the process is incomplete. Other times, people simply overlook reports that are required to be filed by the state. The following is NOT an all-inclusive list, but the minimum requirements for an entity to provide protection.
- The entity must have a solid operating agreement or bylaws, meetings, and minutes from those meetings – even if there is only one officer and shareholder. Bylaws and operating agreements are governance documents. If a determination is made that an entity is not governed or governed properly the entity could fail. The requirements for an operating agreement or bylaws are beyond the scope of this article. Only a competent professional can advise business owners on this subject.
- Books and records – It is imperative that a corporate entity has good books. Books may be maintained in an accounting program or even in a spreadsheet. The important factor is that there is no co-mingling of assets or expenses between the entity and its owners. If you pay for a business expense out of a personal account or the reverse, make sure that there is a paper trail showing reimbursement. When an entity is found to be nothing more than a straw man or personal piggy bank, the veil can be pierced.
- State filings – a corporation, LLC or other entity must file certain reports annually or the state will revoke its charter a with that – the right to conduct business in the state ceases AND potentially be unable to defend itself or file suit. In Texas, entities are required to file two forms on May 15th for the previous calendar year. These forms are the franchise tax return (even if there are no taxes due) and the personal information report. Normally the state will send a deficiency notice, however, they may send it to the wrong address or wrong person.
Enjoying the protection an entity provides is not difficult with some guidance and effort. Failure to comply with some basic procedures can have disastrous results For a free consultation, contact David Disraeli at 512-464-1110 or david@pcfo.net