It is very important to remember that no matter which type of entity you decide on, corporation or LLC, it is not a fait accompli that just by forming those entities, you automatically limit your liability. You must conduct yourself properly as an LLC or a corporation, which means:
- There must be annual meetings.
- The corporation must be authorized through a meeting of the shareholders (yes, even if there is only one) to change bank accounts, or take on debt to buy a car or to sign a lease, etc.
This seems very convoluted because it is very easy to blur the line between the corporation and the owner. Using the “As the owner, I just decided,” method of running an LLC or corporation will hurt the very protections from liability that the owner tried to accomplish. If you decide you want to claim corporate or LLC protection, it is very important that you conduct yourself accordingly. Not having annual meetings and/or not having meetings where you authorize the corporation to take on debt will very easily be seen by a litigator as not acting as a corporation. It can also cause the IRS to treat you as a non corporate entity, which could then cost you some valuable corporate benefits. Allowing a potential litigant or the IRS to “pierce the corporate veil” could be very costly.
Following the rules and acting exactly like a corporation or LLC will allow you to be able to get the result that you desire. Many clients of mine, unfortunately, treat their corporations or LLCs like their personal checkbooks and pay personal bills, mortgages, utilities, etc. with corporate funds. Though this is not illegal per se, provided you do not deduct these non-business expenses but rather charge them as income to the owner(s). However it is another factor for a litigant or the IRS to consider when determining whether or not you are really a corporation.
If you are going to be a corporation or an LLC, which are two vehicles that I usually advise my clients to use as a way to start their businesses, it is very important that you act like one for the life of the business. Otherwise the time spent with your financial consultant, tax advisor, and attorney could be wasted.