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dreamstime_m_38413827Frankly, most people starting a new business in New York do it wrong. Some don’t bother to incorporate or create a limited liability company (LLC) and instead just set up shop. Some do pay an attorney or accountant to set up a corporation or LLC but do nothing more once they get the corporate kit. Rarely, does anyone do it right from beginning to end.

The reason most people fail when setting up a new business is that no one has adequately explained the hows and whys. The main reason you set up a corporation or LLC is to avoid being personally sued something the business did. If the company breaks a contract, you as the business owner don’t want to lose your house in the lawsuit.

But, and this is critical, you have to actually use the business structure and don’t let the corporate kit gather dust on the shelf.

If you do not obey the formalities a judge could find that the business is a “mere alter ego” of the owner. This is bad. What it means in English is that the owner can be held personally liable for the actions of the company. The business structure in this instance will not protect the owner.

Whether you have a corporation or an LLC you must obey what the law calls “the formalities.” For a corporation you need directors and officers. They can be the same people. You need to hold meetings and document the meetings. Finally, you cannot treat corporate assets as your own.

The last point is the one which is most often breached. As the owner, you view the money of the business as your own.  You should put yourself on salary and become a W-2 employee.  Can you have the business pay your mortgage or car note, without violating the corporate formalities? Talk to your accountant. He’ll tell you to take a shareholder’s loan, a shareholder’s draw or some other acceptable method.  If you drive a lot for your business, have a director’s resolution stating that in light of the fact that you need to drive for company business, the company will pay for your car. Just taking the money or having the company pay your personal bills directly could get you in trouble.

Just be careful. Anytime you take extra money you lay yourself open to the charge of treating the company as your wallet. When that happens, in a lawsuit a judge could disregard the corporate structure and hold you personally liable.

The take away is not merely to talk to a lawyer before starting a business, but see your attorney annually for a legal checkup to determine the legal health of  your business.