Piercing The Corporate Veil - Revisited

March has just arrived and brought our first real dose of "winter" with it. I don't know about you, but January and February have flown by for me and 2012 has been off to a very busy start. I have been working with many new clients, many of which are starting new businesses and pursuing a new idea (or life long dream). With all of the new excitement I am seeing, I felt that now is a good time to revisit the concept of Piercing the Corporate Veil...

• Because this concept may be new to some of you, a quick explanation may be in order. Quite simply, the act of Piercing the Corporate Veil means that the liability shield that a business owner's Corporation or LLC provides to them is rendered useless and their personal assets are ultimately exposed in some type of litigation against the business. While this may sound ridiculous to you, and in most cases the typical business owner is completely unaware that this can happen, I assure you that it is entirely possible.
• The most common scenario of Piercing the Corporate Veil is that the business owner failed to establish the entity with a firm foundation (perhaps because they took the "do it yourself" approach), did not properly review and document business activities on a regular basis, or allowed other "harmless" actions to blur the lines between personal and corporate separateness.
• In the past few weeks, I have had conversations with multiple attorneys who have had first hand experience with this type of activity and it rarely ends well for anyone. While we all agree that forming the entity with a firm foundation is crucial, it is equally important to maintain it properly on a regular basis through reviews and documenation. I will dig deeper into this in an upcoming blog post.
• I will leave you with this... If you have never taken the time to fully understand the foundation of your business, or what is required to properly maintain it, please contact Safe Shield. We provide a free review of your Corporate documents as well as a plan of action to repair any holes and keep your Corporate Veil secure going forward. More on this in the coming weeks, but feel free to contact Safe Shield today...

Finish 2011 Strong And Start 2012 Stronger

Thanksgiving has come and gone and December is upon us, bringing with it all of the joy and excitement of the Holiday Season. With the Holiday Rush in full swing, many business owners are working feverishly to wrap up year-end business prior to unwrapping whatever Santa might leave under the tree.

It is also a time for many of us to reflect on all of our blessings and look forward to time spent with family and friends. I am truly thankful that I have been blessed with a wonderful family, a rapidly growing business, and a host of wonderful clients and contacts. 2011 has been a year of great growth, both personally and professionally, and I look foward to 2012 and the year ahead.

As we close out the year, let me encourage you to finish 2011 strong and start 2012 even stronger. You might be saying to yourself "gee that's great advice Kent, but how do I do that?". The answer actually isn't all that complicated if you remember 3 important rules:

1. Create a Task List of items that need to be completed by year-end, and prioritize them based on level of importance. As you review the list, those items that should take priority will usually rise to the top in obvious fashion. It is not uncommon for us to avoid the things that we least like to address, but I would suggest doing those things first.
2. Plan for 2012 and document your Goals and Forecasts. Many business owners assume that this requires hours and hours of thought, reflection, research, etc, but I disagree. Yes it takes some time and effort, but it does not require multiple weekends spent in seclusion in the effort to create a 50 page professional document. You know what typically happens with those? More often than not, they are rarely looked at again. I suggest that you review your P & L statement looking for areas where you can eliminate cost and create margin. Then determine how much you want to increase sales, which new accounts you will target, and which relationships you may need to cultivate to make it all happen. I would suggest condensing this information into a 1-2 page document that can be reviewed easily, and often.
3. Address your Corporate Formalities and document things well. When you look at your Task List and identify the top priorities, it is easy to drop this to the bottom or leave it off of the list completely. This is a huge mistake and could prove costly, if not fatal, to your business. Observing Corporate Formalities and properly documenting your business activities is paramount to preserving the integrity of your Corporate Veil and keeping yourself protected personally. If you aren't sure what Corporate Formalities are, please refer to some of my previous blog posts or contact the Safe Shield office.

That's it, that's all there is to it. Sounds pretty straight-forward doesn't it? I would like to close out this post by wishing all of you the very best during this Holiday Season and much success in 2012.

I Don't Know What I Don't Know...

Many years ago I manged a sales guy who regularly made the statement "I don't know what I don't know". He was a good natured guy with a reptuation for being a bit scattered, at times, so my typical response to him was "you don't even know what you know, much less what you don't know". As I said, he was a good natured guy and always took it in stride with a smile.

Fast forward to present day and I have become much more aware of the fact that "I don't know what I don't know", and my kids are a daily reminder of this. As their knowledge grows, they are able to educate me on all kinds of things that I was previously oblivious to. While much of what they share with me isn't exactly world-changing information, it serves a purpose none-the-less. It is a simple reminder to me that I don't "know-it-all".

Have you ever met someone who is widely perceived as a "know-it-all"? I am relatively certain that all of us have come across someone like this at some point and if you are anything like me, you may not hold a "know-it-all" in the highest regard. Let's face it, there is just no way that any one person can know everything and it should be easy for any rational individual to concede that.

The same principle is true in business... no one person can know everything. Of course we all have our areas of expertise and as a business owner, it is that expertise that our business is built on. However, there are many components to running a business and we cannot possibly know everything that there is to know about each one. If we are to be successful in running our business, it is imperative that we rely on our trusted advisors to help us in the areas that fall outside of our respective areas of expertise.

Whether our specific needs are related to technology, accounting and finance, or insurance and risk management... it is paramount to our success that we lean on the wisdom of others to guide us in the areas that we are weak. When we focus 100% of our efforts on the things that we do well and allow others to fill in the gaps within the areas that we don't, our efficiency and profitability will rapidly increase.

I encourage you to willingly state that "I don't know what I don't know", and turn it into a positive by seeking out trusted advisors to help you...

Are You Ignoring Corporate Formalities?

I ask this question knowing with a fair amount of certainty that most business owners would either answer with a definitive "Yes", or would simply respond with a blank stare confirming that they don't fully understand what Corporate Formalities are (much less why they are so important).

• I felt compelled to focus my latest blog post on this subject matter after a recent discussion with one of my trusted attorney contacts. The attorney was sharing with me yet another story of a business owner in crisis due to the piercing of his Corporate Veil . What made this story truly sad is that if the business owner had simply observed Corporate Formalities, the catastrophe that followed would most likely have been avoided. My attorney friend and I were in agreement that it is imperative that business owners understand what Corporate Formalities are and why they are so important.
• I have replayed that conversation muttiple times over the past few days which confirmed that I simply cannot focus enough on the education process surrounding these Corporate Formalities. I think most people understand that one of the most important reason to formalize your business entity is to create a protective layer between the business and personal assets of the shareholder, so it is perplexing to me that the idea of maintaining the integrity of that Corporate Shield is rarely given a second thought.
• The bottom line is this: observing Corporate Formalities is paramount in preserving the Corporate Veil and maintaining the layer of separation between your business and personal activities and assets. If you are unaware, or simply unwilling to take these steps, then the formation of your entity was a complete wast of your time and money.

If you are a typical business owner, I'm sure that you already have a full plate with overseeing the day to day operations of your business. However, I would encourage you to give some thought to Corporate Formalities and the role that they play in fully protecting your business. If you have been ignoring them, consider changing your practices. If you don't fully understand them in the first place, consider contacting me to learn more...

Can't I Just Do The Basics Now & Worry About The Rest Later?

I have heard this question countless times and yet it still causes me to shake my head in disbelief every time I hear it. The short answer is "yes, you can take this approach". However, it doesn't mean that you should. I could use this opportunity to launch a lengthy diatribe that would serve to outline my 144 point arguement against this, but I'll simply share a sad story instead:

• I recently learned about a situation that is ultimately going to cost a business owner dearly and at this point it appears unavoidable. Once upon a time a pair of family members decided to form a corporation and filed Articles of Incorporation with the MN Secretary of State's office. At the time, they were fully aware that they needed a number of other vital documents to properly complete the incorporation process, but were busy running a business and just assumed they'd get around to it later. They discussed a number of the key foundational elements, were in full agreement, and felt comfortable with their "verbal contracts".
• Fast forward about five years, and these guys are in serious trouble. They now find themselves in a litigious situation with an outside party and their "verbal contracts" are basically worthless. They have no Bylaws, no Buy/Sell or Member Control Agreement, and no clear documentation of how Shares were acquired. Sadly, this decision made several years ago is going to greatly affect their business and may even destroy it completely. If only they had spent a little bit of time and money to have their incorporation done properly, and subsequently maintained ongoing Corporate Formalities, they would not be in this situation today. Unfortunately for them, it is most likely too late.

While I wish this story was nothing more than that, a story, it unfortunately is a very real life situation that is far too common. I come into contact with these sad situations much too frequently and look forward to a day when they will hopefully be the exception, not the rule.

Please keep this in mind if you are considering forming a business, or may have already done so without the help of a professional advisor...

But Can't I Just Do This Myself?

You'd be suprised how often people ask me this question when it comes to Business Formation, Corporate Formalities, Corporate Governance, and Corporate Record Compliance. The short answer is "yes" you most certainly can, but that doesn't mean you can do it right or even do it at all. I am sure that I "could" do a lot of things such as overhaul the engine in my pick-up, or maybe even build my next home. However, I am smart enough not to attempt to do these things because I don't posess the knowledge or other qualifications to accomplish them. To lend a little more insight in this area, allow me to briefly zero in on a couple of these key areas:

• Many prospective business owners stumble accross the Articles of Incorporation templates provided on the Secretary of State's web site, fill it out, and send it in with their filing fee. They then assume (wrongfully so) that they own a company and are authorized to operate it. They never bother to read the fine print on the forms that states that this is simply basic information recquired by the Secretary of State's office and may not be suitable documentation for the formation of your entity. They do not have all of the additional foundational documentation that establishes ownership, how ownership was acquired, who has been appointed to govern the entity, who the officers are, what authority the carry, bylaws, stock certificates, a stock ledger, etc. It is only a matter of time before the "can't I just do it myself" approach catches up with them in a big way.
• A majority of all business owners think that they can manage Corporate Formalities, Corporate Governance, and Corporate Record Compliance issues on their own as well. However, once I begin to educate them on what is required, advise them of some of the serious consequences should they continue to fail in these areas, and demonstrate that they are already face substantial risk... then they begin to realize that they may need help. While it doesn't happen often after they have been fully educated, from time to time I will still get the question "can't I just do this myself?" It is pretty easy to put it to rest when I point out that they obviously haven't been addressing these areas within their business so what makes them think they will do it now...

While I could go on and on with this post, I will end here (for now) and address this further in one of my coming posts!

Are You Really a Business?

Many times I find myself talking to a "business owner" and find myself holding back from asking them what I really want to ask them... "Are you really a business?" I am amazed at the number of business owners who never take the steps to incorporate or formalize their business entity. Forming an LLC or a Corporation is one of the most important steps that you could ever take, yet so many people never take it. You may be asking yourself, "why do these things matter?" Let me share a few of the reasons with you:

• First and foremost, forming an LLC or Corporation provides you with a layer of separation between your business and personal assets. In my opinion, many business owners don't lend much consideration to the liability & exposure that goes along with owning a business. Creating a liability shield around your personal assets and maintaining separation between business and personal activities is crucial.
• Secondly, there are certain tax advantages that can be utilized within a Corporation. Many business owners have no idea that they are subjecting themselves to some unnecessary taxation because they are not incorporated.
• Finally, there is a level of credibility and legitimacy that you gain when you formalize your business and add "LLC" or "Inc" to your name. Think of it as an accreditation process that you should go through...

If you found these thoughts interesting, or if they caused you to do some thinking of your own, give Safe Shield a call for more information.