I will attempt to address here what many business owners don't know, but should know.
PERSONAL LIABILITY. As a business owner, you may be exposed to personal liability for activities related to your business. As such, your personal assets may also be exposed to the risk of attachment, seizure and sale. To reduce the risk of personal liability, consider creating a separate legal entity for your business and file a Declaration of Homestead (if applicable in your jurisdiction) for your primary residence.
CHOICE OF ENTITY. There are several ways you may create a separate legal entity, including, establishing a Corporation or a Limited Liability Company [LLC]. Factors involved in deciding which business formation is right for you, include, the following: is there foreign or US ownership of the business; how many owners of the business; is the business involved in international or domestic transactions; and other related issues.
SEPARATE IDENTITY. In giving birth to a new Corporation or an LLC, you are, in the legal sense, giving birth to a “Person” with its own identity, its own tax identification number, and its own liability. One of the keys to reducing the risks of third parties “piercing the corporate veil,” is to treat the new entity as a separate legal Person. For example, open a new bank account for the new entity and all funds should be maintained separately, and avoid commingling business funds with the owners’ funds. There are other ways in which the corporate veil can be pierced, such as under capitalization, engaging in activity that you know or should know will damage another, etc.
Also, purchase orders, letterhead, receipts, labels, advertisements, signage, contracts, etc., should reflect the full legal name of the entity, including the suffix (“Inc.”, “Corp.”, “LLC”, etc.). In addition, as an Officer or Director of the Corporation or a Manager of the LLC, each contract or other document you sign on behalf the business should be signed with your title describing the capacity under which you are signing, for example, “Sarah Smith, as President of Smith Wholesalers, Inc.” Any contract signed without such language may be deemed to have been entered into by you personally and any liability arising out of such a contact may be outside the scope of corporate or LLC protection.
Typically, there is more paper work associated with corporate compliance than LLC compliance, in that there are additional formalities required in maintaining an “Active Corporation.” For example, a corporation must file the Articles of Organization, draft By-Laws, conduct annual Board of Directors meetings, keep records of meetings, file Annual Reports (different from financial Annual Reports) with the Secretary of State, etc. One basic rule to remember is that, in order to have the protection of a Corporation you must “act” like a Corporation. Simply filing the Articles of Organization with the Secretary of State and paying the filing fee is not enough to protect you. To establish a Corporation in Massachusetts, the filing fee for the Articles of Organization is generally, Two Hundred Seventy-Five Dollars ($275.00). To maintain a Corporation in Massachusetts, the Annual Report filing fee is approximately One Hundred Twenty-five Dollars ($125.00) each year.
With regard to an LLC, there are less formalities required, e.g., (depending upon your jurisdiction and operating agreement) typically, no annual meetings or minutes are required. To establish an LLC in Massachusetts, the filing fee for a Certificate of Organization in Massachusetts is Five Hundred Dollars ($500.00). To maintain an LLC in Massachusetts, you must file an annual report each year and the filing fee is Five Hundred Dollars ($500.00) each year.
DECLARATION OF HOMESTEAD. Other means of protecting your personal assets include, filing a Declaration of Homestead (if recognized and applicable in your State). As an example, in Massachusetts, a proper filing of a Declaration of Homestead at the appropriate Registry of Deeds, protects the equity in the primary residence of the owner/declarant from certain creditors, up to Five Hundred Thousand Dollars ($500,000.00) per family (over 62 years old the protection is $500,000 each.
Take steps to protect yourself and the assets you have worked hard to acquire and remember, even if you don't have a lot of assets today, judgements granted today could be enforceable for up to 20 years. Create a separate legal entity and file a Declaration of Homestead (if applicable).
Disclaimer: This article is provided for informational use only. This article is not intended to be and is not legal advice. Consult an attorney with regard to the specific details of your situation. Filing fees may change.