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“Child” Neglect Runs Rampant in Remodeling Industry

By December 19, 2013No Comments

Stealing its money, selling its toys, not protecting it from danger. These are the actions of a neglectful “parent”. The “parent,” in this case, is the business owner and the “child” its business.

Minnesota statute § 181.723, enacted January 1, 2009, requires independent contractors performing commercial or residential construction or improvement to have an Independent Contractor Exemption Certificate (“ICEC”) unless the contractor is an entity such as a corporation or limited liability company (LLC).

Because the ICEC is expensive and complicated, most contractors operate as a corporation or LLC. Unfortunately, the number of contractors who neglect their entity everyday is astounding. To recognize entity neglect, one must understand what it means to have an entity.

A business entity is a “person” separate from its owner. Creating an entity builds a legal wall between the liabilities of the business and the personal assets of the owner. The wall provides protection from lawsuits related to the business.

What the law giveth, the law can taketh away. As a parent must care for its children, an owner must care for its entity. Neglect the entity and it can be taken away. The law calls this a fiduciary duty; it means that you do not treat the assets of the business as if they are your own. Don’t use the company checkbook to buy groceries or pay household bills. Don’t buy supplies for home improvement projects with company funds. Get permission before the entity borrows money or buys real estate.

How does an owner care for an entity? After the entity is “born” by filing documents with the Secretary of State, the owners elect a board of directors to manage the business. The board appoints officers – president, secretary, and treasurer – and grants them the authority to carry out day to day business activities. An entity is required by law to hold a meeting at least once a year to elect a board and appoint officers.

The penalty for neglecting the entity by failing to follow legal formalities is severe. Called “piercing the corporate veil,” the wall protecting the owner’s personal assets from business liabilities comes crashing down giving creditors access to the owner’s personal assets.

Responsible owners take proper care of their entities by following legal formalities to keep the wall between business liabilities and personal assets intact. Document money put into or taken out of your business. Obtain authorization before borrowing money or selling a business asset. Keep a record of all important company decisions and meeting notes in your company record book. It doesn’t matter whether you are the only owner or have partners, you must document the required meetings and obtain the required authorizations.

Your business attorney will help you protect your entity. Business ownership requires more than selling and building customer projects. You work hard every day to build a future for yourself and your family. Don’t put everything you are working to build be taken from you because you neglect your entity.


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