Reverse StuffPosted: September 7, 2011
Forming a business entity, whether a corporation, limited liability company, or other entity, provides certain asset protection against legal claims (as well as giving a business some street cred because you can put “Inc.” or “LLC” behind your name).
My brother drills water wells for a living (and for the sheer thrill that finding underground water provides). We formed a corporation about 7 years ago, so if Bill’s water-well drilling operation creates a legal liability (exempli gratia [e.g.] he mistakenly drills into a high-pressure natural gas main and blows Douglas County, Nebraska to Kingdom Come), only the assets within Allen Well Company, Inc. are subject to litigation and legal claims–assuming Allen Well Company, Inc. is a legitimate, separate entity from Bill the individual. (Note well [NB]: Assumptions, hunches, and gut feelings are not appropriate business practices.)
Let’s say Bill blows up Douglas County. Harmed individuals would probably sue his company. If their claims exceed his insurance coverage and the company’s assets, they might attempt a corporate veil piercing, a legal doctrine that allows claimants to pursue his personal assets–not just the company’s assets. A court would consider many factors to determine whether those claimants could pierce the veil. They include:
- Did Bill maintain a corporate minute book?
- Did Bill ever take his kids to the water park on the company credit card with no ordinary and necessary business purpose (IRS-speak) and report the expense on the company tax return?
- Did Bill’s brother Dan seriously just hyperlink the Internal Revenue Code? What a dork. (This actually is not a factor.)
- Did Bill’s corporation file separate tax returns from his and his wife’s individual Form 1040?
- Did Bill’s corporation have its own bank account, and do bank records report adequate initial capitalization?
- Blah, blah, blah.
OK, you get the picture. Do not intermingle personal and business matters. Surely, you can take dough out of the company to buy groceries or to take a vacation, but you should not report those as business expenses on the company tax return. (Yeah, I typed “surely”, not “sure”. Substitute “certain” and “certainly” and you’ll know whether to use “sure” or “surely”. You’ll just sound snobbish.) Now, let’s take this to another level.
TIMEOUT: The following paragraphs are not “paragraphing”. I don’t know why. Deal with it. TIMEIN.