Deciding on an entity type is a decision that can have a big impact on a new business. One of the many reasons that entrepreneurs decide to pursue forming a Corporation or LLC is to protect themselves from being held personally liable for the liabilities of their company. Unfortunately, once the business officially becomes a Corporation or LLC it may still face liability if it does not observe certain formalities.

Some of the formalities that Corporations and LLCs should observe include:

Having Bylaws or Operating Agreements that set forth how the company is operated.
Holding regular meetings and keeping record of the meeting minutes.
Maintaining a bank account for the company and never comingling personal and company funds.
Conducting business under the company’s name and making it clear to third parties who they are doing business with.
Filing taxes appropriately.
Small businesses and individual owners might find these formalities especially onerous. Where there is a single person in a company, he or she may wonder if it is necessary to hold a meeting with themselves and keep minutes of that meeting. While it may feel odd, this formality could prevent the owner from being held personally liable for business liabilities.

In the short term, a business may save a few minutes by not following these formalities. However, in the long term, individuals may find themselves liable for debts and legal claims that could have been avoided.

If you own a business and are interested in discussing the formalities necessary to limit personal liability, please contact the Small Business Clinic at (336) 279-9217 or businessclinic@elon.edu.