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Saturday, May 5, 2012

Piercing The Corporate Veil - Revisited (Part 2)

I published an article a few weeks ago that was centered around Piercing the Corporate Veil and while I did share quite a bit of information at that time, I also promised to share more in future posts.  Based on some recent conversations that I have had with new clients and some trusted advisors from my contact sphere, I think now is a great time to revisit this.

In my previous article, I shared a number of areas that can place a business (and its owner) in serious jeopardy if they are not properly addressed.  I would like to take a few minutes today to expand on some of those areas...
  • It is not uncommon for a business owner to overlook some key management aspects of the business, particularly so in closely held small businesses.  Designating proper officer titles and ensuring that each officer is fully aware of his/her roles and responsibilities is crucial.  I recently heard about a small business owner who found himself in a fair amount of legal trouble because he had created a number of "shell" businesses for various real estate and investment ventures, reflected his wife as an officer and governor, and in some cases had her listed as the sole owner of the business.  The problem is that his wife had no idea how many companies existed, nor was she aware that she was an owner/officer in many of them.  Ultimately, the LLCs were peirced and it cost the business owner a substantial amount of money.
  • Mismanaging or commingling funds is another common mistake.  I cannot tell you how many times I have encountered small business owners who pay personal expenses from their business account and believe it doesn't matter or is justified because they are the sole owner.  Not only is the business owner blurring the lines between what is legal and ethical with practices that may not be legal or ethical, buth they are also setting themselves up to have their Corporate or LLC Veil pierced.  The whole purpose behind creating an entity is to demonstrate separation between business and personal activities and create a liability shield for the owner and their personal assets.  Paying personal expenses from the business account is basically disregarding that separation and exposing the business owner personally.  It could also lead to tax avoidance issues if the business owner is attempting to "write off" personal expenses by paying for them through the business and treating them as deductible expenses.
  • Another area that is worth mentioning is when a business owner (or owners) have multiple businesses that work together without proper documentation of the relationship(s) between the businesses.  For example, a business owner may own a number of investment properties in several different LLCs and then have another separate entity act as the management company for those properties.  While there is nothing wrong with this, and in fact is actually a good idea, it is important to have some clearly defined agreements in place between the entities so that funds that are passing back and forth between them can be clearly linked to the service or management agreements that are in place to support these activities.
  • Finally, if you are a business owner who decides to buy a building so that you can run your business out of that building and be your own landlord, do not make the all to common mistake of ignoring the need for a Lease Agreement.  I understand that you may be the sole owner of Company A, the operating business, as well as Company B, the property owning business, but they are still distinct and separate entities so it is very important that they conduct themselves in that manner and sign a valid Lease Agreement, just as any other tennant would be required to sign.
There are other important matters that should be covered and I will circle back to these in the next couple of months, but I think this is sufficient information to get you thinking for now.  I hope that each of you will examine your own business practices closely and make adjustments where needed...