Part 1-Protecting the Business from the Creditors of its Owners
There are many businesses out there that, while they remain viable, are struggling with debt and cash flow issues. To compound the problem, the owners of those businesses may be struggling personally with debt and cash flow issues of their own. All business owners should therefore take the following relatively simple precautionary measures to insure that their personal creditors cannot reach business assets:
– Each line of business should ideally be owned and operated by its own limited liability entity such as a corporation or limited liability company.
– The legal formalities associated with a particular entity, such as shareholders’ and directors’ meetings and minutes, should be followed closely.
– Valuable assets used in the business, such as real estate, vehicles and other expensive equipment, and intellectual property, should be owned by a separate limited liability company and leased or licensed to the operating entity under a written lease or license agreement containing fair market terms.
– Intercompany loans should be fully documented and their terms should be arms-length.
– Each entity should maintain its own bank accounts and accounting records.
– Personal expenses should not be paid by the business entity.
– Business contracts relative to a particular entity should be in the exact legal name of that entity and signed by an officer of the entity in his or her representative capacity (i.e., “John Doe, President, XYZ Corporation”).
– Care should be taken in structuring the ownership of each entity to ensure that a bankruptcy trustee or creditor of one of the owners of the entity cannot reach inside the entity and make decisions regarding the assets and operations of that entity. Single member entities should be avoided where possible.
– Governing documents of each entity should be reviewed first to determine that they have actually been signed and next to determine if they need to be revised to ensure that financial problems of the owners will not adversely impact the business.
In any event, you should consult with an experienced business attorney in order to properly analyze how well your business is protected from the creditors of its shareholders or members.
An attorney and certified public accountant (CPA), Gregory M. Johnson heads MartinWren’s Business, Corporate, & Tax Law practice area.
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