To reduce their personal liability exposure, many building owners hold their properties through a business entity, such as a partnership or limited liability company. However, simply forming a corporate entity and transferring ownership does not automatically protect personal assets. Property owners need to operate a legitimate business, in accordance with the selected entity type. (Choosing the right business entity requires guidance from an experienced attorney, as well as an accountant who can weigh in on the tax consequences of each.)
Consider the theoretical example in which someone slips and falls on the property and decides to sue for negligence. The individual could sue both the corporate entity and the principal owner(s). If the courts determine that the entity is being used as a “shell” company, the owners could face personal liability – a situation known as piercing or lifting the corporate veil.
Lowering personal exposure risk
The best way to avoid such exposure is to follow – and document – the corporate formalities required by the chosen business entity, such as holding meetings and recording meeting minutes. (Again, an attorney can provide specific guidance in this area.) In addition, building owners should try to avoid the following red flags, which a court will consider when determining whether to assign personal liability:
- Corporate principals routinely remove funds from the entity for either personal use or for use by a related business entity.
- In a similar vein, the corporate entity does not maintain sufficient operating capital, instead relying on external cash infusions (such as direct payment by principals).
- The entity shares ownership and/or office space, telephone numbers, etc., with a principal or related entities.
- Corporate decisions benefit the principals, rather than the business entity.
The recurring theme here is that the corporate entity needs to, in fact, function as an actual business, with its own capital, owners and officers who act in the best interest of the entity, and official business proceedings.
We hope you found this article helpful. While we’re not attorneys, we’re happy to answer questions (if we can) and refer you to legal advisers. Just contact us at 877-576-5200 or leave a comment below.