Setting up a corporation helps shield your personal assets and personal liability for the debts or actions of your company. It’s treated as a separate legal entity and you must treat it as such which includes avoiding the co mingling of funds, assets and credit files.
One of the reasons to build business credit that gets overlooked the most is protection of the corporate veil.
Unfortunately, corporate veil piercing is the most litigated issue in corporate law today and is more common with small privately held entities. While there are many factors that can cause this let’s focus on the alter ego theory.
Under the alter ego theory a creditor looking to pierce the corporate veil must prove that the owner did not operate his entity as if it were a separate legal entity. This includes some of the formal requirements such as required meetings and recordkeeping.
But did you know this also includes separating your personal financial affairs from your entity’s financial affairs?
By co mingling assets which involves using personal resources like your personal credit cards for business purposes and vice versa you open yourself up to the alter ego theory.
So does this give you incentive enough to build business credit for your company?
You see one of the underlying benefits is the ability to establish a new and separate credit file that is unique from your own personal profile. By doing this you can obtain trade credit, credit cards, leases and loans strictly in the name of your business.
This enables you to separate the financial affairs of your business completely eliminating both your personal credit and personal liability from the equation.
When you decide to build small business credit, the following are the first basic steps:
- Incorporate or form a Limited Liability Company
- Obtain a Business Federal Tax Identification Number
- Complete Corporate Compliance
- Open a Small Business Bank Account
- Get Listed with the Business Credit Bureaus
- Establish Business Credit History
- Optimize your Business Credit file and Scores
As long as you respect this separateness, your business entity will have no issues being recognized as a separate entity and will be ultimately responsible for its own debts.
Now there may be instances where a personal guarantee is required to secure a credit line or loan especially if your business has not established enough creditworthiness but make sure the agreements are properly recorded and formally authorized by your entity if in fact your entity’s management structure requires it.
Remember, proper recordkeeping is critical to protecting your limited liability even when you establish business credit in the name of your business.
Don’t leave yourself open to a possible alter ego theory because you don’t want to have unlimited, personal liability for all the debts of your business.