As a business owner there are many things you need to keep track of. Whether you are managing inventory, personnel, or simply investment holdings – all businesses need to follow basic formalities to remain within legal compliance and to avoid unnecessary liability to third parties.

Now, the very purpose of business entities is to own assets or operate a business and shield the owners’ other assets from third party claims against the entity. In fact, Florida law provides that a “member or manager [of a limited liability company] is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager.”

However, there are certain instances that can lead to a court of law to disregard the entity and “pierce the corporation’s veil” of limited liability to hold the individual shareholders liable to the corporation’s creditors. While a single instance of oversight will not likely lead to a court looking past the limited liability of the business entity, it is a combination of these missteps that can suggest that the owners of the entity did not separate themselves from the business, or that the company committed fraudulent actions.

One of the common issues that leads to this happening is through the improper use of business and personal assets. This “commingling of assets” as it is called, is when you use company assets or funds for personal debts or purposes.  Additionally, it is likewise considered commingling if you use personal assets or funds for company debts or purposes.

Similarly, what is known as, “diversion of assets,” can factor into a court piercing the corporate veil as well. This occurs when an owner or shareholder does not follow corporate policies and procedures when taking out a loan from the company, or uses the company funds to pay for a personal expense. The assets are being “diverted” away from the company without proper documentation.

When it comes to proper documentation, many owners and shareholders fail to follow the very business formalities that were put in place to avoid liability in the first place.

For example, a limited liability company lacking an operating agreement and/or not following the rules and procedures outlined in the agreement all indicate that the entity did not follow proper procedures.  Likewise, a corporation failing to hold annual meetings or maintaining records indicates a failure to follow proper procedures.  Again, while a single misstep or oversight alone may not be problematic, a series of or a pattern of these issues can cause business owners serious headaches down the line.

In conclusion, a few simple steps can help avoid problematic situations when it comes to corporate governance and compliance related matters for your business.  

Please consult your legal advisor for advice specific to your situation. This article is not a substitute for legal advice adapted to a particular situation.