Liability and Corporate Records
One of the primary reasons business owners choose to form an LLC or an S-corporation, rather than operating as a sole proprietor under their own name, is liability protection.
When someone does business in their individual capacity, any aggrieved party can sue them personally for alleged wrongdoing. If a court enters a judgment, the owner’s personal assets (such as bank accounts, real estate, or other property) may be subject to collection.
By contrast, when a business is properly formed and operated as a separate legal entity, such as an LLC or S-corporation, and the owner deals with customers and third parties only in their capacity as an officer or employee of that entity, the business’s liabilities generally stay with the business. This separation between the business and its owners is commonly referred to as the “corporate veil.”
In Minnesota, the liability protection provided by an LLC or S-corporation is strong, but it is not absolute. In certain circumstances, courts may hold owners personally liable for business debts and obligations. This is known as “piercing the corporate veil.”
When determining whether veil piercing is appropriate, Minnesota courts consider several factors, including whether the owners failed to observe corporate formalities, or failed to maintain proper corporate records.
In speaking with prospective clients, a common misconception frequently arises. Many business owners believe that forming an LLC or S-corporation is complete once they file paperwork with the Minnesota Secretary of State and obtain a federal tax identification number from the IRS. While those steps are necessary, they are not sufficient to preserve liability protection. Filing formation documents creates the entity, but it does not, by itself, ensure that courts will respect the business as a separate entity, protecting an owner from personal liability, if a dispute arises.
To maximize protection against personal liability, business owners must do more than simply form an entity. They must also:
- Maintain Corporate Formalities
This means consistently acting like a business, not like an extension of yourself. For example:
- Adopt and follow bylaws (for corporations) or an operating agreement (for LLCs)
- Create a board of directors and appoint officers—even if the company has a single owner or is owned by a married couple
- Make and document important decisions through proper corporate action
- Maintain Proper Corporate Records
This includes:
- Keeping written records of company actions at least annually
- Documenting significant decisions (such as major contracts, loans, or asset purchases)
- Maintaining a corporate record book that reflects the ongoing operation of the business as a separate entity
Together these practices demonstrate that the business is real, independent, and deserving of the liability protections the law provides. Put another way, your corporate formalities, along with your corporate record book, are evidence that you were not just using your business as an alter ego. Your business actually acted like a business.
The business attorneys at Deckert Law regularly assist clients with establishing, repairing, and maintaining proper corporate records and formalities. Whether you are forming a new entity or addressing gaps in existing records, proactive compliance can be a critical step in protecting your personal assets.
Created by Joseph Pates
