Many people are aware that one of the big benefits of forming a company is protecting personal assets. A legally formed company is its own separate legal entity, and while the company can be sued or liable to someone, all that the debtor can get are the assets and money of the company—not the assets of the owners, managers, or officers individually.
That's called a corporate veil. But there are times when that corporate veil can be pierced, allowing a debtor or someone with a judgment to come after your personal assets to collect a business judgment. Often, this happens when a business owner makes mistakes or gets careless, giving the creditor an avenue to go after personal assets.
Read on as our Chicago business litigation lawyer at Ellis Legal explains more.
Using Your Own Personal Name
One big mistake that people make is signing contracts in their own name, personally, and not as an officer, or on behalf of the company.
And it's' not just your signature that matters—the body of the contract matters also. Signing a contract in your name "as President of the company" won't shield you if you are named individually in the body or text of the contract itself.
Mixing and Commingling Debts and Assets
Another common mistake is commingling personal assets, money, and liabilities with corporate ones. This often happens when someone keeps corporate money in their personal bank account or has the company pay a personal debt (like a car payment). When the line blurs between personal and corporate debts, assets, income, payments, and budgeting, a court can find that you, personally, are just an "alter ego" of the company, making you one and the same.
Avoiding Alter Ego Liability
There are steps you can take to avoid becoming an alter ego of the company itself.
If there will be money or assets or debts paid or deposited into your personal account, document it. Document both what is being deposited or paid, but also, document it with a corporate resolution.
So, for example, if the company has agreed to make your personal car payment, there should be a resolution in the corporate records that says that (and preferably, which explains why the payment is being made by the company).
Payments that a company makes to or for your personal debts or liabilities, should be consistent. Don't pay your car payment this month with company money, then nothing next month, then the month after, the company makes your mortgage payment. This haphazard, inconsistent, and undocumented intermingling of corporate and personal expenses is a recipe for disaster.
Stay Within Corporate Authorization
If you are making a deal, signing a contract, expanding the company, or taking any other kind of corporate action, don't do it on your own. Make sure there is some corporate approval behind you, like a meeting where the board of directors has approved what you are doing. This way, you don't look like you're acting "on your own," but rather, in your corporate capacity.
Speak with a Chicago business litigation attorney at Ellis Legal at (312) 967-7629 to make sure that you and your company are protected as much as legally possible.