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They can't sue me. I am a corporation.

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Small businesses owners hiding behind the mantra “I can’t get sued! I am a corporation!” must remove misconceptions. Anyone can sue anyone for anything. If you form a valid business entity, however, you may discourage suit or find an early exit from litigation.

 

Two things to do:

One: BE A REAL CORPORATION.

Two: ACT LIKE A REAL CORPORATION.

 

One of the most desirable features of corporations, limited liability companies and limited partnership, or limited liability partnerships, is that liability is generally limited to the amount of the individual owners' investment.

 

The answer to questions about whether you are personally liable for:

  • actions (negligent or intentional) of employees, or
  • accounts payable to vendors, or
  • failure to perform corporate obligations  

may lie in whether you have acted as a real corporation and if you can show the realness of your corporate identity.  

In a real-life-worst-case scenario: Joe Businessowner[1]comes in and states that he is being sued by Jane Bystander who was injured by an employee who ran over Jane’s foot with a forklift. Joe paid employees out of his personal account at times, and out of his business account at times. He also paid his personal electricity bill and his vacation out of his business account. Joe has never filed a certificate of incorporation and he has never kept meeting minutes. Now Joe says, “well they can’t get my money can they? I paid $50 to the Secretary of State and I am a corporation.”

In less egregious case, Jack's Construction Company claimed that Jill's dog-grooming business was under the same corporate protection. The supplies were paid for out of the corporate account, but all proceeds were going to Jill (Jack's wife). 

 

In many states including Iowa, the law provides that if the owners of a company do not follow general business protocol, creditors (including people who file lawsuits) can “pierce the corporate veil” and attribute personal liability to the owners of the company.

The attorney for the creditor (other side) will typically demand to examine your company’s records.

The best defense is to maintain precise company records[2]including:

  • A Minute Book. - company’s records which may contain: written actions and minutes of meetings[3]. Anything significant should be documented in minutes including elections of directors and officers, contract approvals, budget and changes to the governance of the company. Meetings usually need not be held in person. Telephonic or e-meetings are common. 

 

  • Bylaws or Operating Agreement. - documents addressing business governance (possibly including: who votes, how votes are counted, tax issues, buy/sell, dissolution and other rights).

 

  • Stock or Unit certificates register. - tangible evidence of business ownership. Most commonly, the number of shares/units is less important than the percentage of ownership of the total outstanding shares/units. Certificates may also categorize shares as non-voting owners (“silent partners”); or owners may have a right to a preferential return.

 

 

  • Separate accounting-  If I need to go over the importance of eliminating the co-mingling of owner funds and business funds, see paragraph above about worst-case scenario.

In a sentence: if owners ignore business formalities, the law will ignore the separate existence of the business entity.

In my experience, the business owners who ignore business formalities do not (or didn’t) believe in the potential for growth and success of their businesses. Attention to detail and formality at business start up is not expensive. Inattention may be costly.

 

- Christine Branstad



[1]Not his real name.

[2]If this sounds like “too much hassle” read my prior blogs on putting things in writingand succession planning..

 

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