Mistake No. 2: Failure to Maintain Corporate Formalities
The second deadly mistake is a variation of the first. Business owners who make the effort to set up a formal business entity often fail to treat the company separate from their personal affairs. If you do not separate your business and personal intersts, a court may find that you are personally liable for the obligations of the company.
Roy was excited to begin his new business. Anxious to protect his personal assets, he submitted the appropriate paperwork for his company.
The business grew at a steady pace. When money was scarce at home, it was nice to have the business pay his
mortgage or his son's college tuition. Roy and his wife, Jean, enjoyed taking the neighbors out to dinner courtesy of the business credit card. The business bouth season tickets to the Suns and Cardinals for Roy, and season tickets to the theather for Jean. After a few years, the business bought a cabin in the mountains where Roy and Jean could relax on the weekends.
As the business continued to grow, Roy began to spin off related companies. From time-to-time, one of the related companies was short on funds, so Roy's Racers, Inc., the strongest of the companies, would cover a payroll or pay a vendor. It was easy for Jean to transfer funds back and forth between the entities using online banking.
Business took a turn for the worse. Roy cut expenses, but it wasn't enough to keep current on company bills. Creditors began filing lawsuits against the companies. The attorneys for his creditors kept poking and prodding at company finances, ultimately asserting that the companies were "alter egos" for Roy and Jean. Roy was stunned when he learned that because he had not maintained proper corporate formalities, the court could disregard the corporate entities - "pierce the corporate veil" is how the attorney described it - and enter a judgement against Roy and Jean personally.
How to Avoid Mistake No. 2:
If you have gone to the effort to formalize your business through a corporation or limited liability company, be sure to treat the business like a real business. Keep business and personal finances separate. Open separate bank accounts for each entity. Hold regular meetings of the shareholders, officers, and directors. Update corporate minutes each year. Corporations should file annual reports with the Arizona Corporation Commission as needed.
Treat your business like a real business. Maintain the formalities that will allow you to protect yourself from personal liability.