When you formed your business, you may have contemplated what type of business entity to choose. You likely considered sole proprietorship, partnership, corporation or limited liability company (LLC). Each entity has certain advantages and some disadvantages. Generally, to protect yourself from personal liability, the two best alternatives are either a corporation or a limited liability company.
Under Nevada law, a limited liability company has greater protection against personal liability than a corporation. However, some businesses choose to be formed and maintained as corporations. Corporations generally protect an individual owner from personal liability. However, there are certain circumstances where a party suing your business can “pierce the corporate veil.” In other words, that party can seek to have an individual legally held responsible (and liable) for the actions or inactions of the corporation.
There is a particular statute that spells out when a shareholder, officer or director of a corporation can be held personally liable. NRS 78.747 provides that there is no such liability, unless that person acts as the “alter ego” of the corporation. The statute defines which activities constitute acting as the “alter ego”
A stockholder, director or officer acts as the alter ego of a corporation if:
(a) The corporation is influenced and governed by the stockholder, director or officer;
(b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and
(c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice.
In English, essentially, these items mean that the owners, officers and/or directors have treated the corporation as nothing more than an extension of the individual(s). The individual(s) may have commingled funds, neglected to keep proper records or failed to keep proper distinctions between the corporation and themselves.
To protect yourself from personal liability, take the following actions and precautions:
- Follow the rules set forth in your bylaws – if you do not have formal bylaws, create them;
- Observe corporate formalities like keeping your corporation in good standing with the Secretary of State’s office; holding meetings; and maintaining minutes of your meetings;
- Keep detailed and accurate records – if you are giving money to your corporation, properly document it as an investment or a loan;
- Ensure that your corporation is sufficiently capitalized;
- Do not commingle personal and business funds – do not ever use corporate funds for personal expenses; and
- Sign all contracts in the name of the corporation.
Please contact Gordon Law if you have any questions about the formation of a business or how to maintain it to protect your personal assets.