Your LLC (or Corporation) Won’t Protect You If You Don’t Treat It Like a Company
A surprising number of business owners believe that forming an LLC or corporation is like flipping a switch: now their personal assets are safe.
The truth is more complicated—and more dangerous.
Limited liability protection is only as strong as your commitment to corporate formalities.
If you don’t operate your company properly, the legal protections you paid for can disappear when you need them most.
The Myth of "Automatic" Protection
Filing articles of organization (for LLCs) or incorporation (for corporations) with the Secretary of State starts the process, but it doesn’t finish it.
Courts in California (and across the U.S.) can "pierce the corporate veil" if they find that a company was merely the alter ego of its owners. In practical terms, this means:
Your personal assets can be on the hook for business debts and judgments
You can be sued personally if the court sees abuse or neglect of corporate structure
Creditors, plaintiffs, or regulators may disregard the entity and treat you as the business itself
LLCs vs. Corporations: Different Rules, Same Risks
Both LLCs and corporations provide liability protection—but the way you must maintain that protection differs.
- LLCs were designed to be simpler and more flexible. They don’t require annual shareholder meetings or a board of directors. But that doesn’t mean they’re casual. You still need a written operating agreement, clean financial separation, and documentation of key decisions.
- Corporations come with heavier statutory formalities. You must adopt bylaws, issue stock, hold regular board and shareholder meetings, and maintain minutes and resolutions. Failure to do so not only jeopardizes liability protection but can also cause tax headaches and investor distrust.
The key is this: regardless of the structure you choose, courts expect you to run it like a company, not a hobby.
Common Ways Owners Put Themselves at Risk
Even responsible, well-meaning business owners make these mistakes:
Commingling funds: Using the company account to pay personal bills, or vice versa
Failing to maintain separate books: No accounting, sloppy records, or shared financial accounts
Signing contracts personally: Failing to sign in the name of the entity, with your correct title
No minutes or resolutions (for corporations): Major decisions not formally documented
Ignoring the operating agreement (for LLCs) or bylaws (for corporations)
Treating the entity like a hobby: Using it inconsistently, without structure, planning, or documentation
Any one of these might seem harmless. But in litigation, they add up—and paint a picture of an entity that doesn’t really exist apart from its owner.
The Hidden Formalities: Notice and Quorum
Many business owners think they’re “covered” simply because they hold a meeting once in a while. But meetings without proper notice or a quorum may not count.
Notice: Corporations (and often LLCs that adopt similar procedures) must give advance notice to directors or members before meetings. Skipping this step means decisions can be challenged later as invalid.
Quorum: Most bylaws or operating agreements require that a certain number of directors, managers, or members be present before business can be conducted. Without quorum, the meeting doesn’t legally exist—even if everyone present agrees.
Consequences: Courts, regulators, or investors can treat improperly held meetings as if they never happened. That undermines your liability shield, invalidates decisions, and creates chaos if there’s a dispute.
It’s not enough to “go through the motions.” You must hold meetings properly, with notice and quorum, and record minutes or resolutions.
Real-World Scenarios That Threaten Personal Assets
This isn’t just a theoretical concern. Here are common claims that small business owners face every day that could jeopardize personal assets if corporate formalities aren’t followed:
Breach of contract: A vendor or customer claims your business didn’t deliver as promised
Wage and hour violations: An employee claims they were misclassified, underpaid, or denied overtime
Slip and fall or injury claims: A customer or contractor is injured on your premises or job site
Discrimination or wrongful termination: An HR misstep or poor documentation leads to a lawsuit
Data breach or cybersecurity incident: You handle sensitive information and didn’t take proper safeguards
Unpaid taxes or penalties: You didn’t file or pay correctly, and the IRS or EDD comes after you
If the opposing party can show you didn’t treat your business like a real legal entity, a court could allow them to "pierce the veil."
That means your personal assets are now exposed, including:
Your home — a plaintiff could record a lien and cloud your title
Your personal bank accounts — which can be levied by judgment creditors
Your retirement funds (including 401(k)s and IRAs, if not properly protected by law)
Your investment accounts — potentially subject to garnishment
Even joint assets with a spouse — meaning family property could be pulled into the case
Example: Imagine you classify a worker as an “independent contractor” when under California law they should have been treated as an employee. The worker sues for unpaid overtime and benefits. Because your LLC or corporation didn’t follow proper formalities—no minutes, sloppy records, contracts signed personally—the court finds the company is just your “alter ego.” Overnight, your personal checking account is frozen, your savings are at risk, and a lien is placed on your family home.
Government Audits Are Personal Too
It’s not just private lawsuits you have to worry about. California’s Employment Development Department (EDD) and the IRS actively audit businesses for worker misclassification, unpaid payroll taxes, and sloppy bookkeeping.
If they find errors—and your company records don’t prove you operated as a real, separate entity—they can pierce the veil and pursue you personally. That means:
Back taxes
Penalties
Interest
Even personal liability for payroll withholdings you should have collected
For many small business owners, an audit like this can be more devastating than a lawsuit, because the government doesn’t settle easily and has broad collection powers.
And the same discipline that protects you in an audit also builds credibility with banks, investors, and potential buyers. Clean records, proper minutes, and documented authority aren’t just about compliance—they’re about proving you run a legitimate, trustworthy company worth financing or acquiring.
How to Protect the Shield You Paid For
Limited liability is a shield. But it's one you have to maintain.
Here’s what I advise clients—whether you formed an LLC or a corporation:
Open and maintain a dedicated business bank account
Never pay personal expenses from the company account (or vice versa)
Sign everything as a representative of the entity (e.g., "ABC, LLC by Jesse Molina, Managing Member" or "XYZ, Inc. by Jesse Molina, President")
Document decisions: hold and record annual meetings (mandatory for corporations, smart practice for LLCs)
Give proper notice of meetings and meet quorum requirements before taking action
Follow your operating agreement or bylaws
Keep clean books and timely accounting
Avoid casual transactions that blur the lines between personal and business dealings
Maintain records strong enough to withstand an audit or due diligence review
Final Thought
Forming an LLC or corporation is smart.
But if you don’t respect the boundaries between you and your company, neither will the law.
At VBTLaw, I help clients not just form legal entities—but operate them correctly to preserve their protection.
If you’ve formed a company but haven’t kept up with the formalities, you’re not alone. But it’s time to tighten up before a challenge arises.
Your liability shield only works if you do.
Jesse Molina is the Founder and Managing Attorney of Valley Business & Tech Law and an Adjunct Professor of Corporations Law. Based in Fresno, CA, he advises businesses across the Central Valley on governance, liability, and compliance.
