A major concern for business owners and professionals is the threat of lawsuit. In today's litigious environment no business or business owner is immune. If a business is sued, the plaintiff will likely go after the owner's personal assets. To protect oneself from personal liability, business owners should create a corporation or Limited Liability Company (LLC). (Note, professionals, such as doctors, lawyers, CPA's and architects, cannot protect themselves from personal liability by forming a corporation or LLC - so the discussion below applies to non-professionals.)
Incorporating or creating the LLC is a critical first step to protect the business owner's personal assets. (For convenience, I will refer hereinafter to a corporation and LLC as only "corporation," but the discussion applies equally to LLC's.) However, it is possible that, even though the corporation is created, plaintiffs will nevertheless assert personal liability against the owners. That is, plaintiffs will seek to "pierce the corporate veil." To avoid piercing the corporate veil, it is important to maintain the corporate formalities. These formalities ensure that the corporation is not only created, but also operated and maintained properly.
Corporate formalities include preparing and observing Bylaws (i.e., a written statement on how corporate affairs will be handled); holding regular Annual Minutes for shareholders and directors whereby directors and officers are elected and corporate actions are approved; and a Corporate Book is maintained containing, among other things, the up-to-date record of stockholders and capital contributions. Further, business should be conducted in the corporate name by signing corporate documents as an officer rather than in individual name. Also, separate bank accounts and records should be maintained distinguishable from individual accounts.
Even when these formalities are not observed, Virginia Courts have been loath to allow a plaintiff to pierce the corporate veil. Notwithstanding the free pass Virginia courts often provide business owners in these cases, there is the real possibility that, if corporate formalities are not followed, a business owner will be personally liability. So creating the corporation and observing the formalities is the only way to confidently know your personal assets are protected.
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