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Saturday, September 29, 2012

No Corporate Formalities, No Loan!

I've often written about the risks business owners face due to the Piercing of their Corporate Veil for failing to observe the necessary Corporate Formalities.  I speak with business owners about this frequently as more and more of this activity occurs every day, but there is more to this story than that.

Did you know that the failure to observe Corporate or LLC Formalities can also hinder, or negate, your ability to qualify for a bank loan?  I am contacted regularly by bankers whom I work with because they are going through the loan process with a customer and the business owner does not have the proper Corporate or LLC documents that establish them as the business owner, officer, or director who has the authorization to enter into such an agreement with a bank or other financial institution.

Often times the Corporation or LLC was not properly formed and the foundational paperwork is a mess, or in many cases does not even exist, so there is no formal documentation to reflect the ownership of the entity, how it was acquired, who is authorized to represent it, and what the rules and guidlines are that the company operates under.

Just last week I spoke with a business owner who is in the midst of the loan process and his bank is requesting that he provide them with documents that do not exist.  He assumed that since he filed Articles of Organization with the Secretary of State's office that he has a fully established entity and that is simply not the case (in fact it's far from it).  He has no operating agreement, organizational resolutions, contribution agreement, membership certificate, membership ledger, tax id number, etc.  He has a huge gap and is trying to finalize the loan process, but the process has stalled and cannot move forward without a fair amount of work being completed.  The most interesting aspect of this is that he is financially sound and should have no problem qualifying, provided that he has all of his ducks in a row.

I believe that the concept of "No Corporate Formalities, No Loan" is valuable information that many business owners are completely unaware of.  If you fall into this category, I hope you will review the information and do a self-check of your business.  You may also want to consider sharing this information with other business owners that you know.  As always, you should feel free to contact Safe Shield for more information.

Sunday, September 9, 2012

Beware Of Commingling Funds

The practice of commingling funds is a dangerous one and I strongly advise business owners to avoid it at all costs.  When a business owner commingles funds it means that income and expenses are mixed together, either between business and personal accounts or from one business account to another.

I know that many of you would never even consider doing something like this, but I can promise you that it happens all too frequently.  Unfortunately, far too many business owners don't think it's a big deal and therefore do it without giving it so much as a second thought.  The problem with this behavior is that the separation that a legal entity is supposed to provide can be completely washed away due to commingling.

The primary reason that people utilize LLCs and Corporations for their various business ventures is to create separation between their business and personal activities and assets, as well as separation between their individual businesses.  When the business owner commingles funds, it creates a rock solid paper trail intertwining everything that they had hoped to keep separate.

Recently I came into contact with a business owner who found himself in serious trouble due to commingling funds.  It wasn't necessarily an intentional action, but rather ignorance about what he could and couldn't do.  This cost him dearly when the business had to be dissolved in order to settle a judgment against him.  Because things like fuel, cell phones, and other personal expenses had been paid out of the business account it ultimately had to be treated as additional income and other benefits.  It was such a clearly defined example of commingling that the court was required to rule against him, regardless of his "lack of intent" to break the law.  This business owner learned a very costly mistake and it was one that could have been avoided.

Remember, the risks associated with commingling far outweigh any of the percieved benefits and I would encourage you to keep that in mind when assessing your internal business practices.