Keep Your Corporate Shields Up

As a general practice lawyer in Texas, I help a lot of people start their own businesses. I also help people protect their businesses by making sure their corporate shields are up, documentation-wise. See, a lot of people start LLCs and corporations by filing a certificate of formation with the Secretary of State and think they’re all set. They’re not. “Why not?”, you ask. Well, for starters…

If you’re doing business as a sole proprietorship, what some people call a “DBA”, you are the business and are 100% liable personally for all the debts and obligations of the business.  That means that if somebody sues your business, all of your personal stuff (that isn’t otherwise protected under law) is at risk. A main reason business entities like corporations, limited liability companies and limited partnerships are popular is that they are actually a different “person” under the law than the people who own them. That is, if the business acts like a business, doing the things legally and administratively that businesses are supposed to do, the Members of an LLC or the shareholders of a corporation or the limited partners in a limited partnership are protected from liability if the business loses a lawsuit. That means the person who sues your company and wins can’t send the sheriff to your house and take that Monet you have hanging on the bathroom wall to satisfy the judgment. What happens if the business doesn’t do these things? Well, plaintiff’s attorneys have a favorite saying in jury trials (stated with great umbrage): “The defendant was treating the business as his Own Personal Piggy Bank!” This is what they say when it’s not clear enough that the business was operating as a separate entity from its “owner”, especially if the business doesn’t have many assets but the owner does.

So how can you keep up the “corporate shields” to protect your personal stuff?  By doing things like having a Company Agreement or Bylaws or an Agreement of Limited Partnership (a document that sets out how your business entity will be run), having annual meetings and filing minutes in your corporate book (and actually having a corporate book!), signing all agreements, leases, contracts, etc. as an agent of the business entity (John Doe, President/Manager/Managing Member/Etc.) and not in your personal capacity, trying hard never to be a personal guarantor on a loan or lease, etc.

Swinging back around to getting businesses squared away – the good news is that even if you didn’t put these things in place at the beginning, it’s not too late to fix it.  Contact an experienced business lawyer and have a discussion about how to bring your business under the protection the law provides for business entities.

As always, the above is legal information, not legal advice, and it’s based on Texas law because I’m a Texas lawyer.  You should do your own research and get legal advice from an experienced attorney before making business decisions that are discussed in this post.


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