In today's Freedom Friday blog and email newsletter, I want to talk about a topic that, again, I wish more prospective clients would ask me about, and that's alter ego. Now, before we go any further, you might be asking, “What's alter ego”? A better question would be “How can Batman prevent people from knowing he's really Bruce Wayne?” Or “How can Superman prevent people from knowing he's really Clark Kent?” In other words, in today's Freedom Friday blog and email newsletter, I'm talking about how to avoid alter ego in Oklahoma.
Usually the shareholders of a corporation, even a closely held one, or the member(s) of a limited liability company (LLC) can't be held liable personally for a debt or another liability of the business (unless the member or shareholder signed a personal guaranty). However, in some circumstances, courts can allow a creditor to “pierce the corporate veil” in order to attach or levy assets of the individual shareholders or LLC members. The major factors courts look at include undercapitalization and using the company as an “alter ego” (think the LLC is Batman and the member(s) are Bruce Wayne).
So, what is undercapitalization? When a corporation (or LLC) is formed, it needs to be adequately capitalized. Many times, when an LLC is formed, or when a new member joins an LLC, they make a “capital contribution” which is the payment in exchange for their membership interest. The same is true when a shareholder joins a corporation; the payment for their stock is a capital contribution. However, if a company is under-capitalized, this means they do not have enough capital to pay their debts and/or liabilities. “Alter ego” is when the owners of a corporation or member(s) of an LLC treat the company as a partnership, personal asset, sole proprietorship, and not a separate business entity. In today's Freedom Friday blog and email newsletter, I want to share five steps to avoiding alter ego in Oklahoma.
The first step to avoid alter ego in Oklahoma is to make sure the company is adequately capitalized. This means that the company should have sufficient capital when it is first formed in order to pay its debts and liabilities. There should be a sufficient cushion of capital to protect the business owners (the shareholders or LLC members) from having their own personal assets sought after by a creditor through piercing the corporate veil.
Maintain Business Formalities
The second step to avoid alter ego in Oklahoma is to maintain business formalities. This means, if you have a corporation, it should have bylaws, distribute shares of stock to shareholders, document transfers of shares of stock, hold initial and annual meetings of the shareholders and directors, and keep annual filings, taxes, and fees, up to date where the company is incorporated. If you have an LLC, it should have an operating agreement, documentation of transfers of membership, hold regular meetings with the members, and keep its annual filings, taxes, and fees up to date where the company was formed.
Don't Mix Personal and Business Assets
The third step to avoiding alter ego in Oklahoma is don't mix personal and business assets. This means that the corporation or LLC should have its own savings accounts, checking accounts, and credit cards, all specifically dedicated to the business. The funds in the business accounts should not be used to pay for personal expenses, and personal accounts shouldn't be used to pay for expenses of the business, either. Keeping these accounts separate will protect the business owner(s) from accusations of alter ego.
Keep Clients Aware of the Business Entity
The fourth step to avoiding alter ego in Oklahoma is to keep clients aware of the business entity. Business owners should tell their clients they are doing business through the corporation or LLC. All contracts and documents should be by and from the corporation or LLC, and not by a shareholder or LLC member. Invoices should have the company's name. This will also protect the business owner(s) from accusations of alter ego, especially where a client or creditor might claim they weren't aware that the company was a corporation or an LLC.
Keep Business Records
The fifth step to avoid alter ego in Oklahoma is to keep business records. Everything decided and done in and by the business should be documented. All the business formalities discussed above should be documented because these documents can show that the business entity is being treated as separate from the business owners and help avoid alter ego and piercing the corporate veil.
Thinking about starting a small business? Or maybe your business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/