What else could affect Limited Liability?

Companies must not only be properly formed, but properly capitalized and properly run to maintain limited liability. Most companies I work with are properly capitalized, even if they are bootstrapped. The owners have figured out what start-up capital is needed, and have provided appropriate funds and at an appropriate scale.

The classic law school example of a company that is not properly capitalized is a taxi company in New York City where a cab ran over a pedestrian. The cab not only had the minimum required insurance, but the corporation that owned the cab only owned two taxis as assets. In that case, the court found the taxi company was financially set up to be fraudulent and unfair to the injured pedestrian. The court allowed the owner to be sued personally.

To be properly run, owners of companies cannot commingle funds. You need a separate bank account for your entity from day one. All amounts owed to the company should be deposited in company bank accounts, and all money coming out needs a paper trail. If you need gas money, create an expense report and reimburse yourself, or get a company credit card. Do not use your company car for family vacations. Don’t just take money out – pay yourself a salary or have a written policy for compensating the owners in other ways. Commingling means the corporation or LLC is not really a separate legal entity from the owner, and thus the owner may be personally liable for the debts of the company.

Finally, companies (except for professional corporations or professional limited liability companies) need to file annual reports with the Secretary of State each year. Corporation fees are $25 and LLC fees are $200 (plus an $2 electronic filing fee).