Many first-time entrepreneurs read about the asset protection offered by establishing an LLC or a corporation and think that this is all the legal protection they need, believing they can sit back and focus only on running the business, and their personal property will be protected no matter what happens. It’s true that the protections offered by limited liability entities are robust, but in certain cases the court can pierce the corporate veil of these structures in order take the assets of the partners as part of the judgment of a lawsuit.
In general, this happens in situations where the company principals have been found to be negligent or careless in how they’ve run the company, and a plaintiff is claiming damages as a part of the suit. It sounds frightening if you’re a new business owner, but the good news is that there are some simple steps you can take to help shield your assets and the future of the company from this kind of danger.
Due diligence often goes a long way in legal settings
In many cases, due diligence on the part of company officers over a period of time may help to show that there has been no negligence on the part of the owners and partners. You started your business because you had an idea and a method for creating value for your customers, but keep in mind that many unscrupulous players start companies so that they can use business funds for their personal expenses or cheat investors. Officers of the court and plaintiff attorneys are very familiar with these types of cases because they’ve seen it all before, and they may take the opportunity to paint you with this brush on behalf of their clients if you give them an option to do so.
Don’t neglect procedure in the name of fast growth
If you own or operate a company it’s your responsibility to know about the appropriate business filings you need to make in order to protect yourself. Where well-meaning company officers tend to get in trouble is when they rationalize that they can’t spend the time on trivial paperwork in the crucial early stages of the company, because it’s necessary to achieve a certain level of growth in order to meet future profitability goals. This is not, nor will it ever be, a valid legal excuse.
In the eyes of the court these procedures exist for specific reasons, and your failure to follow them in a timely manner will be interpreted as carelessness at best and deception at worst. Think about your business filings the same way you do your payroll: you would never justify delaying your payroll by saying that there were sales calls that had to be made and time was short. It’s a necessary responsibility of running a business, just like making sure your filings are accurate, complete, and on time.
Leaving a paper trail now can protect your business in the future
Paperwork isn’t most people’s idea of a great time, and you will always have many other important things on your plate as you try to get your company off the ground. But taking extra time to do the groundwork now can save you loads of heartache and financial distress later on.
Learning about what needs to be filed
Now you know why it’s important to file the appropriate paperwork in order to protect your business and your assets, but how do you figure out what kinds of filings to keep track of? As a general rule, be more cautious than you think you need to be. Make sure all of your financial statements are recorded and kept, maintain a record of revenue applied through accounts receivable, and note when invoices are paid and from what accounts.
Have someone record and file meeting minutes so you can produce records of when important decisions were discussed and agreed upon. Save and file emails as well, and if an agreement is made verbally then follow up with a conformation email so you have it in writing.
In terms of filings you need to make with the government, it’s best to consult your state’s business website to get a list of regulations and forms for business owners. This goes for any other state your company is registered in as well. Being in good standing with the state by keeping your filings up to date is a good start to proving that your business takes its responsibilities seriously. And for some business or bank ventures, you may need documentation that all is in order, as for example this California certificate of good standing.
Every company needs to worry about legal troubles
If all of your operations are above board, you never misuse company funds, and you’ve surrounded yourself with good people, then you don’t have to go overboard filing paperwork since there’s no concern of a lawsuit, right? Any experienced business owner will tell you that this is a terrible mindset, because lawsuits against your company can come from anywhere. Ex-partners, employees, customers, and many other entities can take actions you wouldn’t expect when financial gains are on the line, and the best thing that you can do is prepare like you are expecting to be sued at any moment, and remember that the harder you make it for someone to prove fault on your side, the more you protect your company.