A little while back you decided to start a company. You were excited and ready to take on the world. In these formative moments everyone told you, “You need to incorporate your business to make sure lawyers can’t get your house.” So, in light of the consequences of doing nothing, you went ahead and filled out the one-page “Articles of Incorporation” form with the Secretary of State’s Office, ponied up the $100 filing fee, and BAM! – You now own a corporate entity.

Hmmm. Now what? Seinfeld re-runs, maybe?
 
Chances are you did exactly what you would have done anyway. You went forward with your business plan. You opened a checking account, ordered some business cards, put together a website, and started making money. But sitting in your file cabinet, quietly and without any notice, rested your Article of Incorporation, patiently biding its time until you would look for it again. Grinning silently to itself with the expectation that one day in the future, Articles (and its best friend “By Laws”) would become the single most loved or hated pieces of paper in your life.
 
Now that I set the stage for a dramatic conclusion (you’ll have to read the rest of the blog to find out how this story ends), let’s get quickly and painlessly to the point: A corporate shield is only effective in protecting your personal assets if you maintain it.
 
There are essentially three basic ways a lawyer can get around the corporate shield and get you personally:
 
(1) Funds/property. This means that you bought Dominos Pizza for the family last Friday with a company check. Or maybe you bought a Handycam for vacation last summer (because it was such a good deal and you just had to have it) and the company paid for it. In sum, you mixed the company funds with your own and it soon becomes difficult to see where one starts and the other ends.
 
Best practice: Keep personal and company funds/property strictly separate. It takes some extra time, but ultimately this protocol will help maintain the corporate shield. For example, if you want to buy Dominos Pizza, then cut a check to yourself from the company account and call it a “distribution.” If you accidentally use the company debit card, make sure you code the expense as a distribution as well. By doing this, you will be a more disciplined manager of your company funds and avoid some very sticky tax situations.  
 
(2) Under funded. What this means is that the company’s assets are disproportionately small for the nature of the business and the risks of doing this sort of business. Typically you will see this when the owner(s) of the company immediately drain the company accounts, through salaries or distributions, as soon as there is cash in the account. This is what some call a “sham” or a “shell” company.
 
Best practice: Keep enough money in the company accounts to cover your expenses on at least a monthly basis. I know this is difficult in the beginning; but remember, this is a separate entity and it needs to be treated like a separate entity. The company needs to have enough cash at its disposal to meet its needs.
 
(3) Failure to follow formalities: In other words, you haven’t forgotten about what is lurking in the file cabinet. There are certain legal formalities that are required under the law that must be followed for your company to be legitimate.
 
Best practice: Be diligent in following the legal formalities, or get someone to do it for you. A corporation will require more formalities than an LLC, but there are still requirements for both. For example, there is the need to file an annual report with the Secretary of State and duties of loyalty. Although not required for an LLC, I typically advise my LLC clients to go ahead and take the extra effort by holding annual meetings with notice to all the members of the LLC, to keep minutes of these meetings, and to follow many of the same formalities as a corporation. Why? Because there is safety in formalities! Although it is a hassle at the time, if you get sued and the other attorney starts asking for documentation about what your house is worth, you will be glad you did. 
 
And now, for the dramatic conclusion . . .
 
There is not a dramatic conclusion. And that’s the way you want it. 
 
About the Author:
Paul Stark is an attorney at the Idaho Business Law Group, PLLC, located in Meridian, Idaho. You can find him at idahobusinesslawgroup.com, email at paul@idahoblg.com or follow him @pstark on Twitter.