If you don’t properly maintain your car, it will ultimately stop running. If you don’t properly maintain your house it physically deteriorates. If you don’t maintain a positive relationship with your family and friends, eventually they will go away.
Similarly, if you don’t do “business entity maintenance” it is possible that a court will disregard the business entity, and you could be personally liable for your business’ costs and actions.
What constitutes “business entity maintenance”? How can you reduce/eliminate the possibility that you will be personally liable for your business’ costs and actions?
The leading Iowa case on this issue is Briggs Transportation Co., Inc. v. Starr Sales Co., Inc. 262 N.W.2d 805 (Iowa 1978). In the Briggs case, BOTH Starr Sales (which turned out to have no assets) and its officers/shareholders were held liable for the amount due to Briggs.
The Briggs case stands for proposition that to avoid personal liability for a business’ debts and actions, businesses must maintain:
(1) Adequate capital,
(2) Appropriate books and records,
(3) A separation of its finances from owners and officers (there no co-mingling of business and personal funds; and the business does not pay personal obligations of its owners and officers),
(4) A valid business operation (the business cannot be used to promote fraud, illegality, or merely further the personal benefit of the owners and officers at the expense of creditors),
(5) An observance of business formalities.
There are several cases dealing with observance of “business formalities”; but in general, these would include (but not be limited to) preparing minutes confirming/authorizing major business transactions and decisions such as: election of officers, transfers of ownership, additional investment of funds, or entering into business obligations. By Iowa statute, minutes are of lesser importance for limited liability companies.
As with every type of “maintenance” some people are capable of doing their own. However, most people call a mechanic, contractor or other trained and experienced individual to help them get the job done right. Call (515-727-0900), or e-mail (info@kreamerlaw.com), us if you need help with your business entity maintenance.
