The primary objective of forming an LLC or corporation to operate your construction company is to protect yourself against business liabilities. It is a great first step to create a corporate veil but alone, not sufficient to maintain it. Unpaid creditors may declare the business owner personally liable for the business debts. They can successfully pierce the corporate veil when owners failed to maintain segregation in their business and financial affairs.
Construction companies are specifically vulnerable because they are cash intensive and operate in a heavily regulated environment. Here are 3 essential practices for owners to consider:
1. Do not commingle financial activities
This is the most common faux-pas. A construction business requires a lot of cash to front materials at the start of a project and carry payroll. On occasions, owners have to advance the funds until progress billing is being collected. Sometimes, as a quid pro quo, the company’s money is used to pay their house’s mortgage, cable bill, etc.
Do this instead:
If you have to contribute funds, issue a company’s resolution authorizing the transaction. Further document it as a note payable or an owner’s investment and record it in the company’s financial records.
It’s easy to use your personal credit card to pay for company’s expenses. Instead, make sure you have a dedicated business credit card in addition to your business bank account. It will maintain your financial activities segregated but also build your business credit.
Vice versa, it’s convenient to cover personal expenses directly from the business account where all the money goes. A safer alternative is to pay yourself: give yourself a minimum salary or pay back your promissory note if you had advanced money to the company as a loan or take an owner’s draw.
2. Document your company business
I guess you understand that the operative word here is segregation. Another great practice to further demonstrate the separation between your company and yourself, is to document your company business in formal minutes kept with your records, regardless if meetings are required under your operating agreement. Major decisions can be reflected in a resolution signed by the member(s).
More than additional administrative work, it creates a paper trail that shows, without any ambiguity, that you treat your business affairs independently than your personal dealings.
3. Match your signature
Now that you have documented the actions you take on behalf of the company, make sure they are carried out under the company name. This means that every time you are signing a contract, or any other documents for the company, make sure your signature mirrors your business hat: spell out your authority within the company. For example, it could be:
Mary Brown, as President
John Smith, as Authorized Member
Altima Business Solutions is a consultancy company that unites Expert Insiders ready to hop on your side, without being full-time employees, with Clients who want to solve particular issues.
For the last 18 years, we have helped businesses access strategic/operational/financial expertise and over $400 million in capital. But we don’t stop there. We advise and develop strong leaders. We work together to transform your business ambitions into a win. We stand always on your side.