Avoid Overlap and Commingling

 

 

 

 

Best Bookkeeping Practices

In the normal course of providing our Compliance Management Service for our amazing Clients we have observed that some client staff members are sometimes uncertain how to maintain a strong corporate veil.

As a professional business owner, you rely heavily on your staff to transact day-to-day business operations.  If staff is unaware of the most common pitfalls of corporate governance, this could lead to business activities in your office that could weaken your corporate veil.

For example, we recently spoke to a bookkeeper for one of our clients. This client has two separate business entities enrolled in our Compliance Management Service. The bookkeeper called to inquire if she could pay for both enrollments with one check. While we understand that paying for products or services with two separate checks might appear to be unnecessary, and that one check for both entities might be easier, in this particular case it would be unwise for a couple of reasons.

First, each company should be maintaining it separate set of financial records to comply with state and federal requirements and to avoid overlap.

Second, because of the requirement for separation mentioned above, the bookkeeper would actually create more work for herself in the long run because of the adjusting entries that will eventually be required on each companies set of books.

To establish and maintain a strong corporate veil of liability protection around your personal assets, each of your business entity’s assets should be segregated. Commingling and overlapping of assets are common mistakes that open the door to veil piercing lawsuits by weakening your corporate veil. In this example, although slightly more inconvenient, our recommendation to the bookkeeper was to pay for each enrollment from each company’s separate checking account. For more information on this subject please refer to Whitepaper #2 ~ Overlap, A Big Problem for Owners of Multiple Businesses.

Additionally, we recommend you take time in an upcoming staff meeting to explain the importance of our service to your staff so they too can help you maintain a strong corporate veil.

If we can be of service to your staff or new employees in this regard, please give us a call. In this example, our Client is fortunate to have a wise bookkeeper who took the time to call our hotline with her question.

As always, it is our pleasure to serve you.


Corporate Assistance LLC is not a law firm . Material discussed is meant for general illustration and/or information purposes only and is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. If legal advice is needed, consult your attorney.

New Website

Corporate Assistance is pleased to announce the launch of its new website. Built using the latest technology, the new Corporate Assistance website is more user-friendly and accessible on computers, tablets and smartphones.

The new website features general information to the public regarding the importance of compliance management and corporate governance activities, as well as the pitfalls most small business professionals make by ignoring important liability risk factors and neglecting required corporate record maintenance.

It also features secure and private access to the Client Portal where paid subscribers have access to all their important corporate documents and records. Additionally, subscribers have access to the latest Corporate Governance and Risk Management (CGR) News and Whitepapers.

The website address has been shortened for convenience when typing on your device. We are sure you will agree. In this case ‘less is more’.

Simply type www.corp-assist.com in your web browser address bar.

Although Corporate Assistance LLC remains the official registered name of the company,  we realize our name is a mouthful. So, feel free to call us by the shortened version we use around the office which is ‘corp-assist‘. We won’t be offended.

By the way, the new website was designed by the capable team at Peter James Website Design located in Bellingham, Washington.

White Papers

Select an article and click on the document link to open the document.

1 – Creating a Strong Company Veil

2 – Overlap a Big Problem for Owners of Multiple Businesses

3 – Your Company Veil Can Protect You From Vicarious Liability

4 – How Does Veil Piercing Work with LLCs

5 – The Landmark Strangi Case ~ A Family Limited Partnership

6 – The Fall of Enron

7 – Gifting Ownership in Private Business Entities

8 – Qualified Plans and Veil Piercing Linkage

9 – Protecting Your Non-Qualified Retirement Plan

10 – Entities Must be Formed Funded and Governed Properly

11 – Developments in LLC Veil Piercing

12 – Equitable Subordination and Veil Piercing

13 – Twelve Common Pitfalls of Corporate Governance

14 – Statutory Frustration

15 – Keeping Your S Corporation Compliant

Changes in Ownership

Notification Requirements for Ownership Changes

At some point or another every business entity will undergo changes in ownership. Perhaps the business will take on new partners or shareholders to accommodate growth.

Or, as the principals near retirement age, the business may be sold to a new owner. In some cases the company owners may decide to simply wind down its affairs and cease operations. In any of these cases corporate governance regulations will require that the appropriate federal and state agencies be notified in writing of the change of ownership or dissolution. Such notification usually involves contacting the IRS and state agencies such as the department of workforce services, unemployment insurance, workers compensation fund and the department of commerce and/or corporations.

If your business has undergone changes in ownership recently that have not been reported to the appropriate agencies, Corporate Assistance stands ready to help you file the appropriate forms and reports.


Corporate Assistance LLC is not a law firm . Material discussed is meant for general illustration and/or information purposes only and is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. If legal advice is needed, consult your attorney.

Frivolous Lawsuits

Lawsuits are on the Rise

Consider the following case reported by the Faces of Lawsuit Abuse

When Roberto Guerrero and his family emigrated from war-torn Nicaragua in the 1980s, they hoped to share their family’s love of coffee with the residents of San Francisco. Starting with one store in 1987, members of the family opened several coffee shops in the Bay Area, including two Cumaica Coffee stores owned by Roberto.

Roberto loves the city of San Francisco and its coffee-loving residents. “San Francisco has been very generous,” he said. “It’s where the doors of opportunity are opened” for first-generation immigrants like himself. Unfortunately, California’s version of the Americans with Disabilities Act (ADA) has created doors of opportunity for plaintiffs’ lawyers to target small businesses like Roberto’s.

It began when Roberto received a letter from a customer who claimed that certain features in Roberto’s store violated the ADA. All were minor violations such as a recycling bin placed too close to a door and a pastry case located too close to a counter. Roberto did not realize his store was in violation of the ADA but quickly made the requested changes and notified the customer.

The customer acknowledged that Roberto made the requested changes yet sued anyway and sought nearly $90,000 in damages. Unlike in most states, California law authorizes monetary damages in ADA cases, which incentivizes enterprising plaintiffs and their lawyers to bring lawsuits for even minor ADA violations. The law also provides for damages of up to $4,000 for each and every visit to a non-compliant business, encouraging plaintiffs to not report problems and instead repeatedly visit a business in order to claim greater payouts.

Roberto was shocked by the lawsuit and even invited the plaintiff and his attorney to see for themselves that the violations were corrected. The plaintiffs’ lawyer conceded that Roberto’s store was in compliance, but said it was too late to avoid the lawsuit. After about a year of litigation, Roberto settled the lawsuit.

But Roberto wasn’t the only small business owner targeted. At least 16 neighboring businesses were also sued by the same plaintiff. Two of them were forced to close. The plaintiff’s attorney claims to have filed 2,000 ADA lawsuits in California on behalf of several serial plaintiffs.

Roberto is angry about these lawsuits and the effect they have on businesses and the neighboring community. “These types of lawsuits highly abuse the law,” he said. “They affect an entire community, not just one business.”

Another recent example is of a patient suing his doctor’s property management LLC for injuries sustained when he slipped and fell while leaving the doctor’s office. Fortunately, the doctor holds his real estate in a separate entity from his medical practice.

Lawsuits are often used as a weapon to attack the corporate veil and to reach business and personal assets in hopes of a settlement. Now more than ever, it is important to follow the rules of corporate governance and to keep your corporate record up-to-date. Please contact your Governance Specialist with any questions or concerns.

As Always, It is our Pleasure to Serve You.


Corporate Assistance LLC is not a law firm .  Material discussed is meant for general illustration and/or information purposes only and is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary.  If legal advice is needed, consult your attorney.

Can LLC Corporate Veils be Pierced?

Corporate Governance Topic for Review

How Does Veil Piercing Work with LLCs?  

Like a corporation, one of the major benefits associated with organizing your business as a limited liability company (LLC) is the ability it offers to protect members’ personal assets from liability claims of 3rd parties and other LLC members. Still, LLCs are subject to veil piercing just like corporations. Because LLCs are relatively new, there is significantly less case law on LLC veil piercing than on corporate veil piercing. However, early court decisions suggest that LLCs will receive treatment similar to corporations, both in terms of the risk of veil piercing and the range of actions required to prevent a successful veil piercing.

Veil Piercing in an LLC Context

Generally speaking, veil piercing strategies are employed whenever there is no general partner with unlimited liability to pursue. A limited partnership, for example, has a general partner who is personally liable for all the partnership’s actions, and limited partners who have limited liability but cannot participate in the management of the company. Since an LLC provides liability protection to all its members, veil piercing is the only avenue to “tag” the business owners with personal liability. Again, since the LLC is a relatively new business form, there have been fewer veil piercing court actions recorded in the case law.

Below are several references of what little case law exists on veil piercing for LLCs:

Refer to Colo. Rev. Stat. 7-80-107 (veil piercing applied to LLCs)
California Corp. Code sec. 1710(b) (equating LLC member liability to corporate shareholder liability)
Illinois Rev. Stat. Ch. 805, para. 180/10
Minn. Stat. Sec. 322b.303(s)
N.D. Cent. Code sec. 10-32-29(3)
Wis. Stat. Ann. Sec. 183.0304(2)

There also is relatively little case law addressing whether LLC members or managers are held to a standard of “fiduciary duties” (e.g. duty of disclosure, duty of care, duty of loyalty). However, LLC managers likely have fiduciary duties (similar to the duty of corporate directors to the corporation and its shareholders, and of general partners to limited partners) to members who do not perform management functions. Some state LLC statutes expressly cover the issue of fiduciary duties owed by members and managers. To pierce the corporate veil under Illinois law, however, requires meeting only two situations: when “unity of interest” and ownership between the parent and subsidiary exist and when “adherence to the fiction of separate corporate existence would sanction a fraud” Van Dorn Co. v. Future Chemical and Oil Corp., 753 F. 2d 565, 569-70 (7th Cir. 1985) cited in Hystro, 18 F.3d at 1388-89.

The Stone v. Hobby Decision

In Stone v. Frederick Hobby Associates II, LLC, the court found that the “instrumentality and identity rules” could be applied, under the facts of the case, to “pierce the corporate veil” of an LLC and hold the individual members personally liable. The plaintiffs, husband and wife, were both physicians. The plaintiffs had entered into a sales agreement with the defendant Connecticut LLC in December 1999 to purchase a residence in Greenwich, Connecticut, for $3,300,000. The home had been only partially completed at the time the sales agreement was executed. The sales agreement contained certain express warranties concerning the condition of the premises, and provided for the completion of certain “punch list” items within 60 days of date after the date of the agreement.

The plaintiffs subsequently filed a lawsuit, alleging defects in the subject property, and that the defendant had failed to complete all the punch-list work. The plaintiffs further alleged the defendant had, on or near the closing date for the purchase of the premises, transferred substantially all of its assets, including the proceeds from the sale of the subject property, to another LLC and to private individuals, including the sole members of the original LLC.

After a court hearing, the court granted the plaintiffs’ application for the statutory prejudgment remedy, and ordered disclosure of the assets of the defendant LLC members. In essence, the court “pierced the veil” of the defendant LLC.

The court further stated that “[t]he limitation on liability provided by incorporation or the formation of a limited liability company is not . . . without boundaries.”. The court held that the same rationale that applies in connection with piercing the corporate veil also applies in the case of an LLC. The court stated further that “[t]he instrumentality and identity rules may be applied in order to ‘pierce the corporate veil’ of a limited liability company.”

Turning to the facts of the case, the court found the defendants were the sole members of the LLC, and that the LLC office was located in a private home (although the LLC did not pay any rental for the space). The court also noted that the LLC never had any assets other than the residential property that the plaintiffs purchased from the LLC and which was now owned by the plaintiffs. Particular attention was paid to a statement made by an attorney for the defendant LLC members to the plaintiffs, “go ahead and sue us. There is no money in [the LLC]. Why do you think we set it up as an LLC in the first place?”

Conclusion

There is no apparent good reason why the “piercing the corporate veil” doctrine should not be applied to LLCs when the facts are comparable. Unless future case law suggests otherwise, the only prudent course for LLC owners to follow is to assume they will be held to the same compliance standards and practices as owners of corporations.

Other lessons from this case: establish a clear and separate identity for the LLC apart from its constituent members (including a separate office, stationery, books, and assets); clearly designate the LLC as the entity entering into and executing business agreements and contracts intended to bind and benefit the LLC; and don’t “dare” potential plaintiffs to sue by arguing that “the LLC doesn’t have any money or assets you can reach, and that’s the reason we formed it.”


Material discussed is meant for general illustration and/or information purposes only and is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. 

Umbrella Insurance

Umbrella Insurance?  What Is It? Red Umbrella

No one would think of owning a car without purchasing basic insurance coverage. In fact, it is usually required by state law. Likewise, your mortgage company will require you to purchase homeowners insurance to protect against catastrophic losses and liability claims before lending you money to purchase a home.

Wise business owners should consider purchasing a personal umbrella policy that increases the limits of their basic auto and homeowners policies. These policies are available for very little additional cost.

Umbrella insurance is extra liability insurance. It is designed to protect you from major claims and lawsuits and as a result it helps protect your assets and your future. It does this in two ways:

  1. Provides additional liability coverage above the limits of your homeowners, auto, and boat insurance policies. This protection is designed to kick in when the liability on these other policies has been exhausted.
  2. Provides coverage for claims that may be excluded by other liability policies including: false arrest, libel, slander, and liability coverage on rental units you own.

Umbrella coverage, professional liability and error & omission coverage are also available for business entities and should be considered as part of an overall risk managment and wealth protection strategy. We recommend that you review all your insurance coverage, personal and business, with your insurance professional. This review should occur at least annually or when any major change in ownership or asset sale/purchase occurs in your business.

As always, it is our pleasure to serve you.


Material discussed is meant for general illustration and/or information purposes only and is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. 

New Headquarters Location

Corporate Assistance is pleased to announce its new corporate headquarters at Union Park Center in Cottonwood Heights, Utah. Located in Salt Lake City’s foremost suburban business district, Corporate Assistance is centrally located and easily accessible via the Interstate 215 freeway.  Simply take the Union Park Avenue exit #9.

Whether traveling through Utah on business or for pleasure, we invite our amazing clients and guests to stop in and pay us a visit. We offer the same great service, now in a more convenient and beautiful location.

6925 Union Park Center, Suite 550 ~ Cottonwood Heights, Utah 84047

Phone: (877) 800-8345