Raleigh Estate Planning and Corporate Law Attorneys

You are here: Home / Blog

What is the Probate Process, and Can I Avoid It?

By

In the conventional wisdom, the probate process does not tend to carry a positive association: it is known for being costly, time-consuming, and stressful. As a result, many people who have experienced the probate process following the death of a loved one want to avoid it in the future and might feel motivated to help other family members avoid it through intentional estate planning.

However, there is quite a bit of confusion that still surrounds the probate process. What exactly does probate mean? How does the process work? Is it generally good for families who want to see their deceased family members’ wishes honored? If not, is it possible to avoid the process? If so, how?

Here, we discuss the probate process, explaining what it is, how it works, and what you can do now to protect your estate – or your loved ones’ estates – in the long term.

What is Probate?

When a person dies, everything he owns, from the cash in his wallet to the money he invested, is considered a part of his estate. Probate is the legal process of settling this estate by paying off the decedent’s debts and distributing his assets.

The probate process is designed to effectively manage estates in cases in which the decedents failed to provide specific directives. It can be lengthy, often taking more than twelve months to complete. From court costs to attorneys’ fees, it can be expensive. And for those who wish to keep their family affairs private, it’s important to know that matters of probate are public record: once an estate is probated, anyone can access information about it, including who inherited the decedent’s property. As such, for many family members mourning a loss, the probate process can make an already emotional and trying event more challenging.

How Does Probate Work?

Upon a person’s death, a personal representative will be designated to manage the estate. This person may have been named in the decedent’s will. If the decedent did not designate anyone, another qualified individual – dictated by State law – will be appointed. The personal representative will submit an application to the court along with a preliminary inventory of the estate, a certified copy of the deceased’s death certificate, and a copy of the will (if applicable). The personal representative will pay a fee to open the estate and must take an oath to carry out certain responsibilities to settle the estate.

During the probate process, the personal representative will fulfill several duties, including the following (among others):

  • Filing an inventory all of the decedent’s assets;
  • Paying any of the estate’s outstanding debts;
  • Providing notice to known creditors;
  • Filing taxes for the decedent;
  • Setting up a bank account to pay for any expenses incurred by the estate, such as debts and funeral costs;
  • Selling assets to cover debts if needed;
  • Distributing assets to known heirs; and
  • Preparing a final accounting to close the estate.

Not all assets are subject to probate. If the decedent named a beneficiary for an asset in a will or by some other instrument, generally, that asset will not pass through probate.

Additionally, North Carolina law specifically designates certain items that do not pass through probate, for instance, life insurance proceeds with a named beneficiary, securities held in transfer-on-death accounts, and jointly-owned property (when the joint owner still lives), among others.

If I Want to Avoid the Probate Process, Can I Set up My Estate Plan to Do So?

Proactively setting up an estate plan to avoid probate can lighten the burden that the process often imposes. Here are a few ways to do so.

Name a beneficiary for your accounts. The most straightforward way to avoid probate is to ensure there is a named beneficiary on all of your – or your loved ones’ – accounts. This should include all retirement accounts, brokerage accounts, bank accounts, and insurance policies, as well as Payable on Death (POD) or Transferable on Death (TOD) accounts. Failure to name a specific beneficiary will result in accounts being probated upon the account holder’s death.

Protect your assets. Naming a beneficiary through a POD or TOD clause will only protect accounts, not personal effects. Living trusts are a tool that can be used to keep any asset out of probate. Bank accounts, real estate, or other personal property like a vehicle can be placed in a living trust. Ownership of the property will be transferred to you as trustee and upon your death, your successor will take control of the trust and distribute the property as dictated by the terms of the trust without going through probate.

Consider a joint tenancy. This option frequently applies to married couples, business partners, or other individuals who share ownership rights in property. Property held in joint tenancy does not pass through probate. Instead, the surviving owner automatically takes full ownership of the shared property.

Designate an heir and keep your assets simple. Estates limited to $20,000 in personal property can be settled through a simplified process that does not require formal probate. Additionally, a surviving spouse stands to inherit all the decedent’s assets and the estate’s value is $30,000 or less, the estate can be settled without probate. If the surviving spouse is the only heir, a simplified probate process known as “summary administration” will apply in place of traditional probate.

Contact Our Experienced Estate Planning Attorneys     

When it comes to securing your assets – or protecting your loved ones’ assets – an estate plan can eliminate much of the burden, cost, and uncertainty that can come from relying on the administrative process. At Wilson Ratledge, our attorneys regularly assist our clients in preparing estate plans that ensure their desires and wishes will be met. For assistance setting up your estate plan, contact one of our experienced North Carolina estate planning attorneys at 919-787-7711 or via our contact form below. We look forward to serving you.

What Is A Special Needs Trust, and How Do I Know if I Need One?

By

If a loved one is disabled, elderly, or otherwise unable to manage his finances, what can you do to help? These individuals often turn to state or federal assistance programs to cover their basic living expenses. However, there are often expenses that public benefit programs do not cover. Further, these programs have strict qualification limits. As such, if your loved one comes into money due to a family death or other life event, it could cost him his much-needed public assistance benefits.

Fortunately, the law supplies a remedy in the form of special needs trusts. Here, we will explain what this type of trust is, how it works, and why it is necessary.

What Is A Special Needs Trust?

At its most basic level, a trust is a legal instrument designed for the safekeeping of assets. Assets like cash, investments, or property can be held in a trust until a specific time or condition warrants distribution. A trustee – the person or entity who is designated to manage the trust – must distribute the assets within the trust in a way that is consistent with the beneficiary’s best interests. This includes authorizing any change to or withdrawal from the trust.

A “special needs trust” or SNT is a specific type of trust that provides a supplemental benefit to a disabled or elderly beneficiary without disqualifying the individual from any public assistance benefits.

How Does A SNT Work?

SNTs are used to fund expenses outside the scope of what is covered by government assistance. The goal is to give the beneficiary access to those things that will enhance the beneficiary’s quality of life. An SNT allows the beneficiary to continue to receive public assistance, while also having a source to fund other goods and services that public assistance does not cover.

By holding the assets of a disabled or elderly individual in an SNT, any increase in assets or income will supplement the beneficiary’s circumstances, rather than potentially disqualifying them from the public assistance programs on which they rely. Many of these individuals depend on programs like Medicaid, Social Security Income, and similar resources to cover basic living expenses. SNTs are intended to fund those expenses outside of the basics that are covered through other means. Furniture, vacations, specialized medical procedures, and sporting equipment are just a few things an SNT can fund.

What Warrants the Use of A SNT?

SNTs were created by federal law to protect Medicaid and SSI recipients. Because public assistance programs impose strict limits regarding assets and income, the SNT keeps the assets of public assistance recipients from barring additional benefits.

For example, if a benefits recipient receives a lawsuit settlement, inheritance, or other monetary gift or award, this change in assets could disqualify him from receiving further benefits. The SNT covers the percentage of the person’s financial needs that public assistance payments do not cover. The assets held within the trust do not count, essentially, to qualify (or bar) the person for public assistance.

In other words, you may gather your loved one’s assets into an SNT to “shield” them from governmental scrutiny, thus effectively allowing your loved one to still qualify for public assistance.

Even if the beneficiary does not currently receive government assistance, an SNT can serve as a supplement to benefit an individual who is unable to manage his finances. Should the beneficiary need to pursue public assistance in the future, the SNT can serve as an immediate resource to fund your loved one’s lifestyle and cover his expenses during the often-lengthy application process for most benefit programs.         

Further, parents of children with special needs can benefit from setting up an SNT, which will ensure that their children have the resources to meet their future needs without risking the ability to receive public assistance benefits. In these cases, the SNT provides a means to pay for goods and services not covered by these benefits. If a parent simply left assets to a disabled child through a standard will, such inheritance could disqualify the child from receiving any government benefits.

How Is A SNT Created?

There are three types of SNTs in North Carolina:

A Self-Settled SNT

The self-settled SNT and the pooled SNT are both funded by the beneficiary’s assets. The name is misleading, however, as a self-settled SNT must be established for the beneficiary’s benefit by a parent, grandparent, legal guardian, or a court and not the beneficiary himself.  

A “Pooled” SNT

Unlike the self-settled trust which is only an option for beneficiaries under the age of sixty-five, the pooled SNT does not have any age restriction and it can pool the resources of many parties, including the beneficiary, to fund it. Pooled SNTs must be managed by a nonprofit association. Medicaid must be reimbursed with any remaining funds in the trust for all self-settled trusts, regardless of the source of the funding.

A Third Party SNT

Finally, third-party SNTs are funded by someone other than the beneficiary. A testamentary trust created by a parent for the benefit of a special needs child to take effect upon the parent’s death is one example of a third-party SNT. These trusts do not have an age restriction and there is no requirement to repay any Medicaid expenses upon the death of the beneficiary.

It’s vital that the person or entity who creates the trust – or its legal representative – crafts the language of the trust carefully to ensure it is valid and will withstand scrutiny. Ideally, the SNT will be created before the beneficiary reaches the age of 65.

Contact Our Experienced Estate Planning Attorneys     

At Wilson Ratledge, our attorneys assist clients in preparing and executing documents that help them remain financially secure and sound. We regularly help clients set up special needs trusts to ensure their family members are sufficiently protected. For assistance, contact one of our experienced North Carolina estate planning attorneys today at 919-787-7711 or via our contact form below. We look forward to serving you.

How Small Businesses Can Recover Financially From The COVID-19 Pandemic

By

Small business owners throughout North Carolina are facing critical decisions, from evaluating the pros and cons of laying off staff, to shaving overhead costs, to finding creative and affordable marketing solutions to generate new leads. Those who’ve seen a substantial downtick in business, or who’ve lost one or more revenue streams entirely, may find themselves in need of emergency financial support simply to keep the lights on. 

Fortunately, there is (arguably) no better time for business owners and founders in need of help. The U.S. Small Business Administration (SBA) recently granted a request made by Governor Roy Cooper for federal relief for business owners facing coronavirus-related economic hardship. Specifically, the approval allows qualifying small businesses to apply for low-interest disaster relief loans and grants. The federal government is also offering, through the IRS and other agencies, a variety of options for small businesses at risk of financial collapse. 

Here, we will survey a handful of those options and share how your business can benefit from them. 

Automatic Relief On 504 Loans

If your business holds commercial properties and received financing through the SBA’s 504 loan program, you may be eligible for relief. Starting in April, the government is automatically making mortgage payments on behalf of qualifying businesses for the portion of mortgages held by the SBA. This initiative is part of the recently-passed Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Economic Injury Disaster Loans (EIDL) 

The federal government is offering low-interest EIDLs directly through the SBA. These loans are intended to help qualifying businesses replace working capital income. They carry an interest rate of 3.75 with up to a 30-year term and an automatic one-year deferment. Additionally, there is no personal guarantee on amounts up to $200,000. 

Some businesses are also eligible to apply for a grant in an amount of up to $10,000. The grants can help replace lost revenue and do not need to be repaid, even if a loan application is denied.

Payroll Protection Program (PPP) Loans

An existing SBA loan program is adding another $349 billion in forgivable small business loans to help businesses maintain payroll. To qualify, applicants must certify that the pandemic-related economic upheaval necessitates a loan to support the business’ ongoing operations. If you qualify, you can receive a loan up to 2.5 times your company’s average monthly payroll. This includes amounts paid as wages and benefits to employees, including small business owners and those with an annual salary of up to $100,000. 

Loans are forgiven if they are used on qualifying expenses like payroll in the eight weeks after the funds are disbursed. However, the amount of the loan that is forgiven may be reduced if the business doesn’t return payroll to pre-pandemic levels by June 30 or if more than 25 percent of the loan is used for non-payroll expenses like rent or utility payments.

Tax Credits For Payroll

If you do not receive – or don’t qualify for – a PPP loan, you may be eligible for other forms of tax relief. New legislation is allowing a refundable employee tax retention credit worth up to $5,000 per employee. To qualify, your business must either be ordered to partially or fully shut down or have experienced a 50 percent decline in quarterly revenue year over year from 2019.

If your company has fewer than 100 employees, the government will pay half of the wages for your employees who are continuing to perform productive work. You can also seek tax deferment, meaning that half your payroll taxes can be delayed until the end of 2021, with the other half due at the end of 2022.

Tax Assistance From A CPA

The CARES Act includes various other forms of tax relief, like the elimination of penalties for withdrawing from 401k funds. As such, speak with your CPA to ensure you are maximizing the relief available to you and to ensure you receive it at the earliest opportunity. To help your CPA and to expedite the process, keep thorough, organized financial records for your company. Be sure to maintain copies for yourself, your CPA, and your corporate attorney.

Increased Vigilance Against Scams And Phishing Attacks 

The fallout from the coronavirus goes beyond economic injury: hackers and scammers are capitalizing on the increasing vulnerability of businesses. Cyberthreats like phishing scams are skyrocketing as companies move to remote workplaces, and tech vendors who support the virtual marketplace are finding themselves less able to respond as they try to manage an unprecedented demand for their services. 

Small businesses should take all steps necessary to avoid these attacks. When you receive communications from an entity or individual purporting to be a government actor, proceed cautiously: generally, the government will not charge a processing fee to originate a loan or disburse grant money, so an organization or individual seeking a fee is likely not legitimate. With phishing scams on the rise, never release any personal information for yourself or your business without first vetting and verifying the source. 

Additionally, do what you can to secure your sensitive business information, from your bank accounts to your login credentials to your CRM system or other customer databases. If you have questions about how to best accomplish this, contact your attorney or an IT professional for assistance. 

Professional Financial and Tax-Related Help for Your Business

At Wilson Ratledge, our corporate law professionals include tax and business attorneys with more than 60 years of combined experience helping business owners thrive. We understand that each situation demands particularized attention and as such, we can help your business navigate pandemic-related economic distress. From evaluating your options to navigating negotiations with creditors and financial institutions throughout the loan application process, we are here to help you do what you can to recover.

For assistance managing your corporate financial affairs, call us at 919-787-7711 or reach out to our team via our contact form below. We look forward to helping you overcome your financial challenges and to keep your business running. 

Vital Steps To Take Before Investing In A Business

By

While no reasonable investor would fund a business on the brink of financial ruin, sometimes, that’s exactly where investors find themselves. This happens when debtors lie about their financial health to secure a loan.

What surprises many clients is that investors often find themselves with no recourse against duplicitous debtors if they fail to take a critical step as part of their due diligence. For various reasons, the most well-intentioned creditors seeking investment opportunities find themselves empty-handed when their debtors file for relief from the debts in bankruptcy court. Unless a bankruptcy judge declares a debt nondischargable, creditors can be completely out of luck.

Fortunately, though, all hope is not lost. The U.S. Bankruptcy Code protects creditors, too, including provisions that allow certain claims to be declared nondischargeable. This means that bankrupt debtors may still be legally on the hook to repay debts, even if the rest of their debts are discharged (released) through the bankruptcy process.

While there is a booming industry of lenders who knowingly take (calculated!) risks in lending funds to debtors without fully knowing their financial situations, this article is directed to the unwitting lender who did not fully understand the risk involved in a transaction. Lenders can – and should – take certain vital steps to ensure they understand a debtor’s financial health before entering a transaction.

Non-Dischargeable Debt: The Bankruptcy Code’s Lender Protection Provision

The U.S. Bankruptcy Code protects creditors by barring debtors from discharging certain debts if they obtained such debt by false representations or fraud, including a failure to disclose their financial hardships or challenges.

In a bankruptcy case, debtors can seek relief from various debts, many of which will be discharged unless a creditor files an objection. These actions will take the form of an “adversarial proceeding” under the Bankruptcy Code and will lead to an entirely separate legal action.

11 USC 523(a)(2) is a mainstay of the bankruptcy system. In short, it protects creditors from losing money to a debtor who may have misrepresented – or failed to disclose the full extent of – his financial situation.

Let’s take a closer look at the Bankruptcy Code’s language: 

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . .

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive[.]

Stated differently, this section of the Bankruptcy Code allows creditors to seek a court declaration that their debts were obtained by false pretenses, a false representation, or actual fraud, and are therefore nondischargeable.

Although the Code doesn’t define the terms false pretenses, false representation, or actual fraud, a bankruptcy court will apply rules and guidelines established in prior cases with similar fact patterns. 

Most importantly, however, the Code only allows false representations about the debtor’s financial condition to serve as the basis of a dischargeability objection if those misrepresentations were made in writing.

The law affords a basic protection: If a debtor lied about (or concealed the full extent of) his financial situation, in writing, before you loaned it money, the debtor may be prohibited from receiving the benefit of having the debt discharged through the bankruptcy system. This means that as a creditor, you may be able to ask a judge to declare your debt nondischargeable.

What Should You Do to Protect Yourself Before Lending Funds to a Business?

Simply put, you, as the lender and potential creditor, must insist that everything related to the financials of your debtor is put in writing before lending anything to keep open the possibility that your claim would be considered non-dischargeable. Ultimately, it will be your burden to prove that the debtor’s statements were materially false and that you relied on those statements to make the loan. If you do not have these representations in writing, unfortunately, you are out of luck.

If you’re a creditor, it’s your burden to prove that the debtor was intentionally deceitful, misleading, or fraudulent in his dealings.  You must also prove that you relied on the debtor’s misrepresentations in deciding to lend him funds.

To ensure your claim remains nondischargeable and to keep your debtor on the hook, develop a practice of collecting financial statements from your debtors before lending any funds. If you lend money to either an individual or business, secure a written statement about the debtor’s financial situation.

The best way to do this is by requesting the following information from the debtor: 

  • written profit and loss statements
  • balance sheets
  • cash flow statements
  • bank records for multiple pertinent time frames

Also, demand that the debtor make written representations that the financial documents provided are true and accurate and that the financial documents disclose all his liabilities. If it turns out that the debtor falsified those statements in any way, you will then have a leg to stand on should you object to the discharge of your debts in bankruptcy court.

These critical steps can be useful in other ways: They will force the debtor to be open and transparent. Securing accurate financial statements will help you assess the debtor’s financial health, potentially saving you from making a bad business decision (that is, lending money to a debtor on the cusp of financial ruin).

Contact Our Experienced Business Law Attorneys.

If you find yourself in need of advice and representation regarding a dischargeability dispute or any number of bankruptcy issues, our attorneys are experienced in representing both debtors and lenders and are here to help.

At Wilson Ratledge, we assist businesses in taking steps to keep them financially secure, while protecting them from legal pitfalls. For assistance growing your business or navigating a deal, contact one of our experienced North Carolina business attorneys today at 919-787-7711 or via our contact form below.

How A Tax Attorney Can Help You Navigate Tax Controversies

By

When they hear about “tax controversies,” many clients initially think of the IRS demanding audits. However, because taxes affect so much of our daily lives, tax controversies can take various forms. Local property tax appeals, state and sales tax controversies, and issues regarding federal and state income tax (at the audit and collections levels) are just a few common types of tax controversies you may face. These issues, among others, can cause significant financial burdens.

Here, we will discuss how tax controversy attorneys can help you resolve taxation issues at both the state and federal level. We will also survey common resolutions to tax disputes, focusing on one common avenue for resolution.

For questions about your potential tax liability and how our team can help you work out issues with either the IRS or the North Carolina Department of Revenue, give us a call.

What Do Tax Controversy Attorneys Do?

Hiring a tax litigation attorney can potentially save you from facing penalties, fines, and even criminal action stemming from noncompliance. However, it is vital to ensure that the attorney you’ve hired is experienced in handling tax-related cases: It is important to note that tax litigation attorneys offer a different skill set than tax planning attorneys. While the skill sets do overlap, tax litigation attorneys need to understand more than just the inner workings of the IRS and the tax code: They also need to understand the rules of evidence and civil procedure, as well as the administrative procedures involved in litigating tax cases.

When working with a tax litigation attorney, you will gain a professional and advocate who will apprise you of the advantages and disadvantages of different courts and litigation strategies, what evidence you need to support your claim, and the risks involved in litigating your case.

When Should I Hire A Tax Attorney?

While many tax-related issues can be resolved without engaging an attorney (for instance, if the IRS demands an audit, the key is to respond immediately upon receiving your first notice), there are some situations in which legal counsel can be enormously beneficial in helping you avoid serious consequences – particularly if legal issues are tied up in the disputes.

Some issues that may require the help of a tax dispute attorney include:

  • Claims of tax fraud or tax evasion.
  • Audits involving business-related taxes like payroll or sales tax investigations.
  • An audit involving issues such as frozen assets, a deficiency balance, incomplete books or records, an inability to pay, a failure to file returns for a certain number of years, charges for taxes you do not owe, or the expiration of the statute of limitations.
  • Audit rulings that you believe are inaccurate.

A tax attorney may also be helpful if:

  • You intend to negotiate a settlement or payment plan for your outstanding tax balance. You may want to engage an attorney’s help in these situations because payment plans require thorough documentation in order to avoid further tax liability and collections attempts from the IRS.
  • You hope to prevent tax-related issues from arising in the first place. For instance, if you have questions about how to keep business records, manage payroll tax, what comprises taxable income in your business, how to manage employee deductions, and other issues, you can work with an attorney proactively to keep issues from arising down the road.

What Are Common Solutions to Tax-Related Disputes?

Running into a tax dispute is never easy, but many are unaware of the plethora of options available to reduce possible penalties associated with tax issues. A tax attorney can work with you and your tax preparer to consider the best possible resolution.

A few common avenues for resolution include, among others:

  • Offers in Compromise
  • Installment payment plans
  • Audit representation
  • Tax court representation
  • IRS appeals hearings
  • Trust fund recovery penalties
  • Innocent spouse representation
  • Non-filer representation
  • Tax levies, garnishments, and seizures
  • NC sales and use tax audits
  • Estate tax audits
  • Jeopardy assessments
  • Discharge of taxes through the bankruptcy process
  • Independent contractor determinations
  • Enrollment tax representation

What is an Offer in Compromise?

A common solution to tax issues, an offer in compromise is, in short, an agreement between a taxpayer and the IRS that settles the taxpayer’s liabilities for less than the full amount owed. To secure an offer in compromise, you will need to convince the IRS that:

  • You are unable to pay the full amount owed within a reasonable timeframe, either as a lump sum or through a negotiated payment plan.
  • The total amount of your tax liability is in question.
  • Payment in full would cause an economic hardship or be unfair to you in some way.

To make this determination, the IRS will examine your income and assets in order to discern your “reasonable collection potential.” To do so, your attorney will help you provide detailed information about your financial situation on the IRS Form 433-A, the “Collection Information Statement.” This will include information about your cash flow, investments, credit, income, and debt, which the IRS will verify. Your attorney can help you gather this information.

The amount of your offer must be equal to what is called the “realizable value” of your assets, plus the amount of money the IRS can take from your income. For instance, if your assets equal $100,000 and the amount of your future income available to the IRS is $50,000, then your minimum offer should be $50,000.

Before working out an offer with the IRS, it is vital to speak with a tax attorney to ensure you are complying with the necessary formalities.

Contact Our Experienced Tax Attorneys

At Wilson Ratledge, our tax controversy attorneys represent taxpayers in disputes with the IRS and the North Carolina Department of Revenue. We regularly handle disputes involving tax liens, audits, and collections, as well as other various aspects of tax controversy and litigation. For assistance, contact one of our experienced North Carolina tax attorneys today at 919-787-7711 or via our contact form below. We look forward to serving you.

Do I Really Need A Bank Account for My Business?

By

Many new entrepreneurs and founders question whether they really need to open a bank account solely for their new ventures. In short, the answer is a resounding yes. Here, we outline a few key reasons why setting up a separate business bank account can keep your company’s finances secure while making sure your personal assets are safe.

Why Keep Them Separated?

In deciding whether you need a bank account for your business, think about the reason why you would set up a business at all: To keep your personal and business identities separate for legal, financial, and taxation reasons. 

On a practical level, this means keeping your business and personal assets separate so that in the event someone sues your company, your personal assets will be shielded from a judgment. In the legal world, this separation between the business and the founder him or herself is referred to as “the corporate veil.”

When lawyers discuss “the corporate veil,” it’s easy to miss the real-world impact of this protection. Imagine that a third party sues your new entity and wins – let’s say it is a bank trying to collect on your company credit card. The bank may use the judicial process to collect that money in a variety of ways, from forcing you to transfer cash to it or by selling your assets in order to generate liquid funds. 

If your company does not have enough cash or assets to satisfy the full amount of the bank’s judgment, then the bank can – and likely will – turn to your personal assets. That is, the sheriff can show up to reclaim your car, put a lien on your home, or withdraw funds from your personal bank account.

Fortunately, there is a way to protect yourself from this nightmare scenario. This is where the corporate veil comes in. The law sets forth several ways to create a corporate veil to protect your business assets – for instance, making sure to follow corporate formalities in running your business. A critical way to create a protective corporate veil, however, is to keep your business and personal assets separate. Arguably, the most unambiguous way to do this is to create a separate account for your business funds.

This matters because a common way for parties to “pierce the corporate veil” is to demonstrate that companies are operating as though they are not, in fact, separate and distinct from the people who own and run them. If you use your personal checking account to cut business checks and deposit client funds into your personal account to pay down your personal bills, you will face an uphill battle in trying to argue that you and your business are, in fact, separate entities.

Keeping the Corporate Veil Intact

In general, business owners have the benefit of the corporate veil to protect their personal assets from business risks, unless there is a good reason to remove that protection. To ensure that you can keep that protection well intact, take the following steps:

  1. Set up a separate bank account for your company through your financial institution of choice.
  2. Commit to using that account ONLY for business purposes.
  3. Commit to using your personal bank accounts ONLY for your personal financial transactions.
  4. Only transfer money between your corporate and personal accounts if you are following the proper corporate formalities required for doing so. If you aren’t sure what these formalities are, consult your lawyer or accountant.
  5. Keep detailed records of all your business expenses, revenue, and recurring expenditures.
  6. If you are unsure of how to handle your business taxes vis a vis your personal ones, hire an accountant experienced in working with startups and small business owners.

Bookkeeping Benefits

Legal formalities aside, maintaining a separate account has numerous other benefits. Keeping separate accounts for personal and business items makes your accounting and bookkeeping practices simple and streamlined. Not only does it save you from parsing your various personal and business expenditures, but it also helps ensure you have included all of your deductible business purchases in your accounting system. If you don’t do this, it can be easy to miss many line items that can help you come tax time.

When you keep your business and personal transactions separate, you will have a clean record to present your preparer at the end of the year. Make sure that you keep your invoices and receipts should you need to furnish proof of particular expenditures.

How Do I Set Up A Business Bank Account?

Fortunately, it is relatively easy to set up a business bank account.

Gather your documentation.

At a minimum, you will need to provide your institution a copy of your filed Articles of Incorporation (for corporations) or Articles of Organization (for LLCs). You will also need to prove your IRS Employer Identification Number or EIN.

Watch out for hidden fees and costs.

When selecting a type of account to use, make sure you confirm whether there is an initial or ongoing minimum deposit requirement. Additionally, read the fine print on monthly fees and charges. When starting a new business, it is important not to be suddenly hit with unexpected fees or charges.

Ask about benefits.

Finally, make sure you ask your representative at your bank about any perks or features, like ways to automatically sort your deposits, how to set up online bill pay, and whether there are any rewards for opening a business credit card with that bank.

Contact Our Experienced Business Law Attorneys         

Starting a business is a thrilling endeavor. However, failing to abide by the proper legal and corporate formalities can land you in trouble. At Wilson Ratledge, we assist business founders in taking steps that keep their businesses – and their personal assets –secure and sound with an eye toward protecting them from avoidable legal pitfalls. For assistance setting up your business account, or for questions regarding your entity, contact one of our experienced North Carolina business attorneys today at 919-787-7711 or via our contact form below.