It’s been said that more new businesses are started during an economic downturn than at any other point in the economic business cycle. With unemployment rates rising, some of those entrepreneurial dreams are born out of necessity due, while others are not. Either way taking the plunge means taking a risk. In this economy no one wants to take more risk than necessary.
One way to limit the risk exposure of your personal assets to such risk is by setting up your business as a corporation. In the eyes of the law a corporation is considered a “person,” a separate legal entity. As a result, you as the owner are able to shield your personal assets by what is called the corporate veil.
The corporate veil, however, is not bulletproof. It can be pierced if the proper precautions are not taken. Here are three common mistakes entrepreneurs are prone to make.
1. Not maintaining corporate formalities.
It’s easy to fall into the “the business is all mine, I can do whatever I want with it” trap. Common symptoms of this affliction are poor bookkeeping, and comingling of funds, including paying your personal bills from the company coffers. Even if you are the sole owner of your corporation, the better way to handle personal expenses is to pay yourself a salary and then pay the bills from that income. Treating the business as a personal piggy bank would allow a stiffed creditor to argue your business is really a proprietorship. If they are successful, your personal assets could become their piggy bank.
2. Not registering a “doing business as” (DBA) name.
A restaurant might have an informal DBA name, for example Hanna’s Bistro, but the corporate entity could be Hanna’s Gourmet Enterprises. Without a DBA registration (available through your state’s Secretary of State Office) no one will be able to connect the dots between the two names and again someone could argue that Hanna’s Bistro is really a proprietorship. Ca-ching.
3. Not signing documents in your business capacity.
Sure, you sign your name to business documents; but, are you adding your title too? Adding your title lets the world know you are signing the documents on behalf of your company. After all, the company is a separate legal entity. So even though you are an owner, legally you and all of your employees are “agents” of the company. As the owner, you are merely wearing more than one hat, and that’s OK.
While any one occasional slip up might not be enough to pierce the corporate veil, a pattern of not respecting the corporate form could be. These mistakes are easy to avoid and worth the effort to protect your personal assets. Smart business owners know that if you take care of your corporation, it’ll take care of you.