When you start doing business for yourself, it is all too easy to operate as a sole proprietor for a period of time. After all, this does not require you to register your business with the Secretary of State or take other formal steps, and you can file taxes on your personal returns. However, such entities provide you no protection from liability should your company get sued or become unable to pay debts. Your personal property and assets would be at risk and you could lose your house.
To protect your personal assets, you should always form a limited liability entity. This could be a:
- Limited liability company
- Limited liability partnership
These entities allow you to establish a corporate veil that separates you personally from your business. This fictional veil shields you from personal liability for business matters and limits your risk in starting the business. Only the assets you put into the business can be lost.
Forming a limited liability entity does not mean that corporate veil will always persist, however. Instead, you must ensure you properly establish and maintain the veil. If you do not, a creditor may be able to “pierce the corporate veil” and go after your personal assets. There are many steps you should take to ensure you establish your corporate veil and protect yourself.
Properly register your business and business name.
By doing so, you formally create a business entity separate from yourself or your partners. If you fail to have a valid registration as a limited liability entity, the state will view you as a sole proprietor or a general partnership without any protections.
Keep personal and business finances separate.
You must always maintain separate business accounts and never commingle your personal finances with your business finances. If you treat your business account like your personal piggy bank or cover business debts with your personal assets, then it is more likely that a court will not view your business as a distinct legal entity and may allow the opposing party to “pierce the corporate veil” to get to your personal assets.
Execute contracts as an agent of the business.
Make sure you enter into all contracts as a representative of the business, so the business is liable for any breach of contract. It is wise to sign contracts with both your name and title (John Smith, as President of Company Name) instead of only putting your name.
Comply with all requirements in California.
Following all necessary requirements for your business entity is critical to be recognized as a company separate from your person. This means filing and updating all organizational documents, complying with all relevant business laws, holding annual meetings for corporations, keeping appropriate records, filing taxes for the business, and more.
Consult with a San Jose Startup Law Firm as Soon as Possible
At Startup Company Counsel, we know the importance of establishing and maintaining a corporate veil. Just because you start a business does not mean you have to put all your personal assets at risk, and we can help you put proper protections in place. Call 408-441-7555 or contact us online today to schedule a consultation so you can learn more about our legal services for startups.