In order for shareholders or members of a corporation or LLC to enjoy protection from personal liability for the company’s debts, obligations and other legal liabilities, the following principles must be followed:
Adequate Capitalization and Funding of the Company: A company must be adequately funded, with amounts sufficient to operate the company and pay its regular bills. Adequate insurance coverage may also be considered.
Adequate Corporate Formalities: A company must hold regular meetings, keep accurate company records and have functioning officers/directors if such are appointed.
Treatment of Company as Separate Business Entity: Business owners cannot merely use the company as a “façade” for personal dealings. Co-mingling of business and personals funds is prohibited and the owner cannot treat the assets as his/her personal property. Relationships with related companies must also be handled in an “arm’s length” fashion.
No Improper Purpose or Reckless Disregard for Rights of Others: A business entity cannot be abused to infringe the rights of others and maintain limited liability protection.