Having a Company Is Not Enough To Protect Your Personal Assets

Quick Pop Quiz: Forming a corporation or limited liability company will safeguard your personal assets in all situations.

Generally speaking, if an entity is properly formed, properly maintained, and properly capitalized, the founders of a corporation or LLC (an entity) risk only their initial capital contribution. Also generally speaking, “piercing the corporate veil” to defeat limited liability and sue the owners of an entity individually is as rare and severe as a lightning strike.

In North Carolina, a business entity can be disregarded (and the owners sued personally) when the corporation is operated as a “mere instrumentality” or “alter ego” of a sole or dominant owner (usually a shareholder or member).

This happens most often when there is an allegation of fraud or other deliberate and deceptive acts in commerce where the company has few assets. The plaintiff (injured party) claims there is no true separation between the company and its owners, and therefore the owners should be personally liable for the wrongdoing.

Courts will analyze (1) inadequate capitalization; (2) non-compliance with corporate formalities; (3) complete domination and control of the corporation so that it has no independent identity; and (4) excessive fragmentation of a single enterprise into separate corporations.

To avoid being personally liable for your company’s acts:

Observe the required formalities: Hold formal annual meetings of shareholders and directors and keep the minutes organized. Timely file all reports and pay all fees to the NC Secretary of State. For an LLC, document all business decisions with a meeting or consent minutes.
Do not commingle personal and business assets.
Make sure your risks are adequately addressed, often via form contracts and insurance.
Properly sign your documents as an officer of the corporation or manager of the LLC. You need to indicate that you are acting on behalf of a company and not as an individual.
Make sure business assets are properly titled to the business, or there is proper insurance to cover incidental business uses of personal assets.