Emphasize Proper Recordkeeping

April 13, 2006

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To avoid court application of the alter ego theory, it is important to separate and document ownership of assets.

The small business owner should purchase an LLC or a corporate Records Kit. This can be done at any office supply store. The kit represents a centralized place to keep the entity's articles of organization, operating agreement (or bylaws), resolutions and minutes from meetings, lease and loan agreements, salary arrangements and ownership certificates.

It is important that the owner use ownership certificates when an equity interest is received in return for a contribution of property to the entity. A kit can be ordered that will contain ownership certificates that are pre-printed with the entity's name. Or a kit can be purchased with blank certificates and then filled in by the owner with the entity's name.

It also is essential that the entity have its own accounting system. If this is not done, it will prove impossible to separate the owner's and the entity's financial affairs. Popular accounting software packages, which are generally affordable and useful, include Quickbooks and Peachtree One-Write Plus.

Work Smart

Don't try to start a new business and learn a new accounting system at the same time. Doing so will often mean that recordkeeping will fail, and the business owner will become vulnerable to a piercing of the veil of limited liability attack by a creditor.

Owners of new businesses will be preoccupied with many issues. With perhaps 60 or 70 hours per week spent on marketing and management issues alone, many small business owners will neglect the business's accounting system.

Ideally, the small business owner should hire a bookkeeper familiar with the software package selected. Admittedly, this may not be realistic in many small businesses, where the budget will not allow this alternative.

In this situation, the small business owner should consider purchasing software and learning how to use it, before starting operations. Many community colleges offer courses or seminars on many popular accounting software packages.

All arrangements between the owner and the entity should be documented. This means that all salary, lease and loan arrangements should be reduced to the form of written agreements between the owner and the entity. While this may seem to border on the absurd in a one-owner business, establishing such a formal relationship with the entity is significant evidence that the owner is treating the entity as separate from himself. Authorization may require a meeting, or that a waiver form be executed by the business's owners.