No Good Deed Goes Unpunished
Good Deed: You and your best friend Sam open up a cleaning business together in Minnesota. Since you are friends, a simple handshake and a promise works for both of you. Your business does its “bookkeeping” by hand because you don’t issue invoices. Your business uses your personal account for the business. You don’t file sales tax because you are in the service industry, and one of your friends (who is an engineer) told you that services aren’t taxed in the State of Minnesota. Both of you believe that hiring professionals to help you with bookkeeping, accounting and legal issues is not necessary due to bookkeeping and accounting software programs and because all legal information is available for free on the internet.
Punishment: If you do not follow corporate formalities, and your business is sued, the court can pierce the corporate veil, and seize your personal assets to pay a business debt.
Factors that the court considers are:
- Insufficient capitalization;
- Failure to observe corporate formalities;
- Nonpayment of dividends;
- Insolvency of debtor corporation at time of transaction in question;
- Siphoning of funds by dominant shareholder (this could be called inequitable distributions);
- Nonfunctioning officers and directors;
- Absence of corporate records; and
- Existence of the corporation as merely a façade for individual dealing
Below are a few examples that can cause additional consequences than “simply” piercing the corporate veil:
1) You and Sam did not charge sales tax. As a result, Minnesota Revenue assessed sales tax on all of your revenues even though not all of your services are taxable.
2) You and Sam did not keep the receipts because you charged everything on a credit card, and you believed, after reading it on the internet, that your credit card statement was sufficient. When you are audited, you are shocked when you find out that isn’t the case, and you are devastated when the IRS determines that you do not have any reasonable and necessary business expenses because you do not have receipts.
3) You used your personal checking account and co-mingled assets of your business. You are shocked when the governing authorities assess all of the personal account deposits as income.
4) You and Sam have a falling out and Sam wants to leave the business, but is demanding a sum of money that you do not believe is fair. Since you do not have a buy-sell agreement that deals with this issue, you end up paying $30,000 to an attorney because Sam sues you and you end up paying Same more than what you think the business is worth.
It is wise and prudent to utilize the assistance of a business attorney. Spangler and de Stefano, PLLP are experienced business attorneys.
The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.