You’ve seen those three letters that follow a business name: "LLC" or "Inc." But what is the main purpose of forming a company and what is the importance of maintaining it?

An LLC (limited liability company) or S-Corporation (Inc.) are two of the main types of small businesses formed in the United States. The formation and rules for those entities can differ according to state law, but the main purpose is similar: to keep the owner(s) from being on the hook for damages that occur during business activities.

For example, if you don’t form a business entity like an LLC or S-Corp and you are sued by somebody claiming their slip and fall accident was a result of negligent ice management on your part, your personal assets (e.g., house, vehicles, bank account funds, etc.) can be put at risk. That’s certainly not a result any business owner wants.

Separate business and personal

While forming a business may seem obvious enough, maintaining that protection (called limited liability protection) may not be as obvious.

One key thing to remember for maintaining your business’s limited liability protection is to maintain a separate bank account in the business name that is tied to your company’s Employer Identification Number. All business funds should flow through that business bank account.

You should not pay personal bills out of the business account, nor should you deposit personal funds, other than capital contributions to the business, into the business account.

Mishandling your business bank account is one of the main ways that business owners find themselves on the hook personally for legal claims that were made for business activities.

Operate under the business entity's name

Another important thing to remember is to only operate in the name of the business entity. This can be very important for snow removal companies since your summer business may use a different name than your snow removal business even as both operate under the same business entity. For example, if you name your business "John Doe Landscaping, LLC" and operate your landscaping business under "John Doe Landscaping, LLC" but operate your snow removal business as "John Doe Snow and Ice Management," most states require that the snow removal business be registered to tie back to the LLC name.

In Minnesota, for example, you would need to register "John Doe Snow and Ice Management" as an assumed name that ties it back to John Doe Landscaping, LLC. Failure to do so could put the limited liability protection at risk. Each state will have different laws regarding how the name you operate your business under must relate to your actual registered entity name. Check your state’s laws to make sure you are compliant.

In the law, as long as you have a business entity you are taking these necessary actions to avoid a creditor attempting to "pierce the corporate veil" to go after your personal assets. While each state has some form of piercing the corporate veil, creditors can use this doctrine to cast aside the limited liability protection of your business. Following these simple rules is a great way to nip that possibility in the bud.

This article provides general information on business matters and should not be relied upon as legal advice. A qualified attorney must analyze all relevant facts and apply the applicable law to any matter before legal advice can be given. If you would like more information regarding contracts, collections, or other legal issues, please contact Zlimen & McGuiness, PLLC. Jared Nusbaum is an attorney at Zlimen & McGuiness, PLLC, in St. Paul, MN. His law practice focuses on assisting contractors & other small business owners. For more information call 651-331- 6500 or info@zmattorneys.com.