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How Can I Protect My Small Business From Lawsuits? —Separation (Part II).

By January 28, 2020 March 7th, 2020 No Comments

By Eduardo A. Maura.

Out of the many things I tell small business owners, when they ask me how to protect their businesses, separation is high in my list of recommendations.

But what do I mean by separation? What I mean is, separate your business from yourself or your family or your other businesses.

It is quite common that small business owners are the managers of the business or are actively involved in the operations of the business. This carries with it the temptation to mix business activities with personal activities.

However, in order to extract the most benefits out of the business’ legal structure, you (as owner) need to be separate and be apart from your business.

For example, there is always the temptation not to pay yourself a salary because the cash flows are low, or to use the company credit card for personal expenses, or to run your business from your home or your other business’ office. Mixing things, while economical and costs saving, can have an adverse impact when, god forbid, your business gets in legal trouble. A plaintiff might want to go after your business and you, or your other business, and may argue to a court that, since you treat the business as your own personal purse, the business and you are one and the same. This is what we called the “alter ego” or “piercing the corporate veil” (PCV) theory. PCV is, as the name suggest, to take out the corporate mask of the entity and have the owners of it be liable as well.

Under this legal theory, a litigant will argue that the company structure is just a facade of you for the purpose of doing improper actions. If you, however, keep a good separation from your business, it will be much harder for people targeting your business to reach your personal assets; in the hypothetical situation that your business runs into legal trouble.

Absolute separation is not always viable, however. For example, most business owners use their single vehicle for business activities too, and paying gas with the company card is reasonable and will carry little risk. But going to Macy’s to shop, or on vacation to Disney, with the company card, will likely be a situation where the commingling of accounts is a very bad idea.

For more information about protection for small businesses call us at 305-570-2208 or email me at eayala@ayalalawpa.com.

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