Examples:

• • Jane keeps her catering income and personal spending in separate checking accounts.
  • Robert’s construction company credit card is never used for personal purchases.
  • Detailed accounting logs explain Susan’s occasional cash infusions to her struggling bakery.
  • Henry earns a regular salary, not random draws, from his marketing agency.
  • Barbara’s software company does not own her primary residence.

How to Proceed:

• • Open dedicated business accounts when starting a company.
  • Issue corporate credit cards and discourage use of personal cards for business.
  • Work with a CPA to validate proper accounting and documentation.
  • Pay yourself a reasonable salary on a set schedule.
  • Title property based on its usage – personal assets under your own name.

FAQs:

• • Are business owners allowed to lend money to their corporation? Yes, if properly documented and at a reasonable interest rate.
  • Can I deduct business expenses paid with personal funds? Yes, but it is cleaner to use a company account/credit card.
  • Should I lease or buy real estate under my company name? It depends – consult a business attorney and CPA first.
  • Will taking a business loan backed by personal assets risk the liability shield? Not necessarily but it may depend on the collateral pledged.
  • How can I correct past commingling mistakes? Consult legal/accounting experts to separate and restructure going forward.

Examples:

• • Karen’s flower shop LLC dutifully holds annual meetings and keeps minutes.
  • On supplier contracts, Paul signs as president of his manufacturing corp, not personally.
  • ABC, Inc. recruited an independent director to its board for unbiased oversight.
  • Laura’s fashion wholesaler has never missed a state filing deadline or tax payment.
  • Rick’s tech startup carefully documents all equity grants and vesting terms to new hires.

How to Proceed:

• • Work with a business attorney to create governing documents and procedures.
  • Understand and use proper signature formats as outlined in bylaws/agreements.
  • Recruit qualified independent directors or advisors for oversight.
  • Calendar all required state/federal filings and report submissions.
  • Maintain cap tables and records with help from financial/legal advisors.

FAQs:

• • What happens if I don’t hold annual meetings? It’s a red flag allowing veil piercing in a lawsuit.
  • How should I sign company checks and contracts? As “Jane Doe, President” never just “Jane Doe.”
  • Can my spouse serve as the independent director? No, they are considered under shareholders’ control.
  • Will a late tax filing or report void my liability protections? Not necessarily but it weakens the shield.
  • Are small corporations exempt from these formalities? No, compliance is required regardless of size.

Examples:

• • Sam’s delivery company maintains 6 months of operating cash in the bank.
  • Valerie’s building firm carries $10M in liability and property coverage.
  • Tim’s parents formally loaned his business $100K, documented with a note.
  • Julia’s skincare line conducts regular quality control and safety audits.
  • Ken’s ad agency socks away 10% of revenue to prepare for client losses.

How to Proceed:

• • Work with CFOs/CPAs to model cash flow needs and retain sufficient liquidity.
  • Meet with insurance brokers to assess proper coverage types and amounts.
  • Carefully document all shareholder loans and report them correctly.
  • Identify top risks and prioritize mitigation plans with advisors’ help.
  • Establish reserves of 10-20% of revenue for downturns and unexpected losses.

FAQs:

• • What is considered “undercapitalization”? Insufficient operating cash to pay bills for several months.
  • How much insurance should my business carry? Amounts vary – discuss with a reputable broker.
  • Can I just deposit personal money if cash is tight? Yes, but document it as a formal loan to the business.
  • What business areas pose the biggest liability risks? It depends on your industry – identify them with CPAs and attorneys.
  • Do LLCs have different capitalization standards than corporations? Not necessarily – both need sufficient operating liquidity.

• • • 1. Which of the following could cause a court to pierce the corporate veil? A) Keeping separate bank accounts B) Following all corporate formalities C) Commingling business and personal funds
    • 2. What does “undercapitalization” of a corporation mean? A) Insufficient operating cash B) Lack of real estate holdings C) Below market valuations
    • 3. When signing contracts, how should corporate representatives sign? A) Personally, to be fully committed B) On behalf of the corporation in their official capacity C) Using just initials to save time
    • 4. Can a spouse serve as a corporation’s independent director? A) Yes, they are a separate person B) No, they are considered controlled by the owner C) Only in certain states
    • 5. How can corporate owners protect themselves from personal liability? A) Staying a sole proprietorship B) Ignoring corporate formalities C) Keeping separate books and records
    • 6. Which action shows a clear separation between personal and business finances? A) Depositing business revenue in a personal account B) Buying equipment with a corporate credit card C) Paying personal bills with a corporate check
    • 7. Are small corporations exempt from holding annual meetings and keeping minutes? A) Yes, only larger corporations must B) No, it’s required regardless of size C) It depends on the state of incorporation
    • 8. When an owner personally guarantees a business loan, does it increase the risk of veil piercing? A) No, it’s commonplace B) Yes, it can weaken the corporate shield C) Only for SBA loans
    • 9. How should shareholder loans to the corporation be documented? A) Promissory note and proper accounting B) Handshake agreement C) No documentation needed – shareholders can withdraw funds anytime
    • 10. What is one way to demonstrate adequate business capitalization? A) Maintaining sufficient cash reserves B) Relying solely on loans and credit C) Keeping bank balances near zero
    • 11. What is a risk of undercapitalizing a corporation? A) Veil piercing in a lawsuit B) Owing more in taxes C) Qualifying for more government contracts
    • 12. How can using a corporate credit card for personal purchases cause issues? A) It’s a tax deductible expense B) It helps boost the owner’s credit score C) It shows a lack of corporate formalities
    • 13. What legal purpose does an independent director serve? A) Unbiased oversight B) Increased access to funding C) Shorter board meetings
    • 14. Which of the following best demonstrates adequate corporate recordkeeping? A) Storing receipts in a shoebox B) Maintaining a corporate minute book C) Using a personal checking account for business
    • 15. When can commingling of funds lead to a loss of personal liability protection? A) If the IRS audits the company B) If a lawsuit is filed against the corporation C) If the company goes public
    • 16. Why is it important to sign contracts in the name of the corporation? A) To avoid personal liability B) To get better interest rates C) To impress clients
    • 17. What should a business owner do if they need to put personal money into the company? A) Deposit it in the corporate account with no documentation B) Characterize it as a shareholder loan with proper records C) Include it as miscellaneous income on their personal tax return
    • 18. How can having insufficient business insurance affect personal liability risk? A) It has no effect on personal liability B) It increases the likelihood of veil piercing C) It automatically triggers director liability
    • 19. What is the purpose of having a separate business bank account? A) To make recordkeeping easier B) To maintain corporate formalities C) Both A and B
    • 20. How often should a corporation hold board meetings and record minutes? A) Once a year B) Once a quarter C) Once a month
    • 21. What should corporate bylaws or an LLC operating agreement include? A) Management structure B) Voting rights C) Ownership percentages D) All of the above
    • 22. Can a corporation have just one owner and still maintain liability protection? A) Yes B) No C) Only in Delaware
    • 23. What is the purpose of obtaining a separate tax ID number (EIN) for a business? A) To open corporate bank accounts B) To file separate tax returns C) Both A and B
    • 24. How does paying personal expenses from a business account affect recordkeeping? A) It makes tracking expenses easier B) It complicates recordkeeping and taxes C) It has no effect on recordkeeping
    • 25. What is the risk of using a personal credit card for business expenses? A) Increased tax deductions B) Difficulty separating personal and business expenses C) Improved corporate credit score
    • 26. What is a key purpose of keeping corporate minutes? A) To document major decisions B) To track employee attendance C) To monitor office supply levels
    • 27. How can a business owner title a vehicle used for both personal and business purposes? A) In the company name for tax benefits B) In their personal name for liability protection C) By creating a new LLC just for the vehicle
    • 28. What is the purpose of having a buy-sell agreement among corporate owners? A) To mandate annual purchases from each other B) To outline share transfer and valuation terms C) To automatically dissolve the business if an owner leaves
    • 29. How does paying owners a regular salary help maintain corporate formalities? A) It shows the owner is an employee, not just an investor B) It allows the owners to contribute more to their Roth IRAs C) It increases the amount of dividends the company can issue
    • 30. What is a consequence of not filing annual reports with the state? A) Loss of limited liability protection B) Increased corporate tax rates C) Requirement to hire more employees
    • 31. How does having an outside CPA compile financial statements help protect the corporate veil? A) It qualifies the company for more loans B) It ensures separation of financial recordkeeping duties C) It automatically prevents veil piercing
    • 32. What legal formality should be followed when issuing stock to corporate owners? A) Verbally promise shares will be granted later B) Officially document percentages and any vesting terms C) Base stock on future intended contributions by each owner
    • 33. Why is it important to have formal lease agreements between a corporation and its owners? A) To get the lowest rental rates B) To show market pricing and arms-length terms C) To allow owners to sublet the space for profit
    • 34. What is the risk of not having an operating agreement for a multi-member LLC? A) Governed by state default rules that may not fit B) All members will be taxed as general partners C) The IRS will automatically classify it as a sole proprietorship
    • 35. What is a benefit of keeping detailed financial records of business expenses and income? A) Easier to separate from personal finances B) Ability to deduct more startup costs C) Both A and B
    • 36. What type of insurance helps protect corporate directors and officers from personal liability? A) Cybersecurity insurance B) D&O insurance C) Key person life insurance
    • 37. How does hiring a payroll service support liability protection for business owners? A) Ensures proper withholding and remittance of taxes B) Eliminates the need for workers compensation coverage C) Prevents any overtime payment disputes
    • 38. What should corporate owners do if they need to shut down the business? A) Sell off all assets and keep the proceeds B) Formally dissolve and notify creditors C) Just stop operating and let the state handle the rest
    • 39. How often should a corporation update its bylaws or operating agreement? A) Every year regardless of any changes B) Every 10 years at a minimum C) Whenever there are changes in ownership, management, or operations
    • 40. What recordkeeping practice best helps track business expenses for tax purposes? A) Using a dedicated business credit card B) Keeping receipts in a desk drawer C) Writing business purchases in a personal planner
    • 41. What is the main reason to establish a corporation or LLC? A) To avoid paying any taxes B) To hide business activities from the government C) To protect personal assets from business liabilities
    • 42. How can a business owner learn about ongoing corporate compliance requirements? A) Consult with an attorney B) Read the Secretary of State’s website C) Both A and B
    • 43. What should be documented in the minutes for major corporate decisions? A) A transcript of the entire discussion B) A summary of the decision and votes C) The personal opinions of each participant
    • 44. What is the purpose of having a registered agent for a corporation or LLC? A) To receive legal and tax notices B) To market the company’s services C) To recruit additional investors
    • 45. How can owners document adequate capitalization when forming a corporation or LLC? A) List intended capital contributions in the formation documents B) Claim they will contribute money laterC) Provide copies of personal bank statements to the state
    • 46. What type of business records should be kept to support liability protection? A) Financial statements B) Tax returns C) Legal agreements D) All of the above
    • 47. How can an owner take money out of a corporation or LLC tax efficiently? A) Randomly writing checks to themselves B) Paying a salary or distributions with proper documentation C) Wiring money to a personal offshore account
    • 48. What is a common reason the IRS or state agencies might investigate a small business? A) Consistently reporting net losses B) Having a high number of employees C) Advertising on social media
    • 49. What is the best way to track mileage expenses for tax purposes? A) Keeping a mileage log for business trips B) Claiming a standard 50% of all personal vehicle mileage C) Not tracking mileage since it’s too complicated
    • 50. What should a business owner do if they are unsure about a potential conflict of interest transaction? A) Consult with a business attorney B) Ask their spouse or close friend C) Assume it’s okay and proceed anyway
  • Answers:
    • • • 1: C) Commingling business and personal funds
        • 2: A) Insufficient operating cash
        • 3: B) On behalf of the corporation in their official capacity
        • 4: B) No, they are considered controlled by the owner
        • 5: C) Keeping separate books and records
        • 6: B) Buying equipment with a corporate credit card
        • 7: B) No, it’s required regardless of size
        • 8: B) Yes, it can weaken the corporate shield
        • 9: A) Promissory note and proper accounting
        • 10: A) Maintaining sufficient cash reserves
        • 11: A) Veil piercing in a lawsuit
        • 12: C) It shows a lack of corporate formalities
        • 13: A) Unbiased oversight
        • 14: B) Maintaining a corporate minute book
        • 15: B) If a lawsuit is filed against the corporation
        • 16: A) To avoid personal liability
        • 17: B) Characterize it as a shareholder loan with proper records
        • 18: B) It increases the likelihood of veil piercing
        • 19: C) Both A and B
        • 20: A) Once a year
        • 21: D) All of the above
        • 22: A) Yes
        • 23: C) Both A and B
        • 24: B) It complicates recordkeeping and taxes
        • 25: B) Difficulty separating personal and business expenses
        • 26: A) To document major decisions
        • 27: B) In their personal name for liability protection
        • 28: B) To outline share transfer and valuation terms
        • 29: A) It shows the owner is an employee, not just an investor
        • 30: A) Loss of limited liability protection
        • 31: B) It ensures separation of financial recordkeeping duties
        • 32: B) Officially document percentages and any vesting terms
        • 33: B) To show market pricing and arms-length terms
        • 34: A) Governed by state default rules that may not fit
        • 35: C) Both A and B
        • 36: B) D&O insurance
        • 37: A) Ensures proper withholding and remittance of taxes
        • 38: B) Formally dissolve and notify creditors
        • 39: C) Whenever there are changes in ownership, management, or operations
        • 40: A) Using a dedicated business credit card
        • 41: C) To protect personal assets from business liabilities
        • 42: C) Both A and B
        • 43: B) A summary of the decision and votes
        • 44: A) To receive legal and tax notices
        • 45: A) List intended capital contributions in the formation documents
        • 46: D) All of the above
        • 47: B) Paying a salary or distributions with proper documentation
        • 48: A) Consistently reporting net losses
        • 49: A) Keeping a mileage log for business trips
        • 50: A) Consult with a business attorney