Contractors choose to operate as corporations or limited liability companies for a number of good reasons. One is to isolate financial responsibility at the company level, without recourse against the individual company owners. For this to be effective, however, the individuals must respect the integrity of the business entity.
The owners of closely held companies, frequently family members or even one individual, are understandably tempted to treat the business as “mine.” This can lead to practices that undermine the firewall the business entity was intended to provide.
In a recent Minnesota case, the sole shareholder, officer and director of a corporate contractor under-capitalized the corporation, transferred funds from corporate accounts to personal accounts, and operated the corporation while it was insolvent. The shareholder also failed to maintain adequate corporate records. The corporation was a fraudulent façade and the shareholder was personally liable to an unpaid subcontractor.
Why go to the trouble and expense of creating a corporation, LLC or other business entity, only to disrespect the independence of that entity? Is it really that difficult to implement practices that maintain the separation between the business enterprise and its individual owners? Your comments are welcomed.