Certain moments at the start of an entrepreneur's journey signify that a new business phase is about to take shape.

One of these happy occasions is the receipt of a handsome, leather-bound binder that contains newly-printed articles of incorporation and corporate share certificates. First-time entrepreneurs often view this binder with a sense of awe and excitement.

Incorporating a business looms as a pivotal event.  It says the founding entrepreneur is serious about the business of being in business.  One young entrepreneur once told me he felt like a grownup the day he held the share certificates of his new corporation.

What you should know about 'the corporate veil'

Corporations are a form of business organization that can be set up by one person or by a group of people.  There are different types of corporations, including professional corporations, standard or "C corporations," and "S corporations"—each with varying administrative requirements and benefits for their founders and shareholders. 

The primary reason for startup entrepreneurs to incorporate a business is generally the opportunity to shield the personal assets (homes, cars, savings accounts, etc.) of the corporation's officers—from potential business debts, product or service liability litigation, and other costly freak-of-nature business calamities. 

This nifty protection, often called the "corporate veil," is especially important to older, second-career entrepreneurs who tend to have more personal assets than younger entrepreneurs who are just starting out.

Now here is the qualifier.  The corporate veil remains intact only if the corporation remains in "good standing" by meeting all of its corporate duties. 

Aggressive banks, landlords, plaintiff attorneys, equipment leasing companies, and suppliers know this rule too.  If business debt-holders are determined to find a way to collect unpaid bills, they will seek to remove the corporate veil by convincing a judge that the corporation's good standing was somehow compromised.  One of the more common and unfortunately successful plaintiff attorney strategies is to prove that the corporation was not run as a separate entity from the founding entrepreneur or corporate officers.

The reason this strategy can pay off for plaintiff attorneys and their clients is the simple fact that time-strapped startup entrepreneurs can be sloppy record-keepers.  Even though they work long hours and are attentive to serving customers well, too often entrepreneurs push aside administrative duties.

How to avoid losing your corporate veil

How can startup entrepreneurs help safeguard their corporate veil?  Here are six action steps that are well within the management capabilities of any ambitious and smart entrepreneur.

1.  Document all loans and advances.  Don't pay corporate bills directly from a personal checking account. If you have to use personal funds to pay growing business obligations, write the personal check to the corporation first and then immediately document the sum as a loan advance or new investment in the corporation.  Equally, don't abuse corporate expense accounts or borrow funds from a corporation without signing a loan document or filing expense reports and immediately reimbursing the corporation.  If you stick to this advice, you'll avoid the perception that your business is not running as a separate entity from yourself.

2.  Keep personal expenses separate.  Get a separate business credit card to manage business travel and other expenses.  Keep personal expenses on a different credit card.

3.  Avoid "naked" signatures.  Vendors and collection agents like to claim that they were misled by small-business owners. They say they thought they were providing a product or service to a person rather than a corporation.  As such, whenever you sign a business letter, contract, lease, loan or purchase order, be careful to include a corporate title and corporate name. This signifies that you are signing in your official capacity as an employee of the corporation. 

4.  Correct billing errors.  All debts, invoices, tax obligations, and other business liabilities should be addressed to the corporation—not you—or amended before payment.  Corporate organizers should sign up for software licenses, office equipment warranties, and other property ownership records in the corporate name.

5.  Do what you said you would do.  At the time of incorporation, entrepreneurs outline certain administration obligations in the corporation's charter and bylaws.  If, for example, your incorporation documents state that the corporation will always have three to five board members, then maintain a board with three to five members.

6.  File all tax returns and corporate annual reports on time.  Some states are more punitive than others with regard to incomplete documentation and tardy filings. Another requirement to help keep a corporation in good standing is to consistently advise the governing state of incorporation of any changes to the corporation's business address, names of officers or directors, capitalization, articles of incorporation or bylaws.  

Hire an attorney or not? I vote yes

Frequently, I'm asked if first-time entrepreneurs should incorporate through online sources or hire an attorney.  Given the high potential cost of losing personal-liability protections from corporate setup mistakes, I encourage entrepreneurs to hire an attorney.  In addition to the comfort of having professional corporate documents, entrepreneurs will receive a corporate entity that best matches the founder’s business goals.  If for example, the entrepreneur expects to raise money from investors, then the corporation can be set up with provisions that are conducive to a growing enterprise with independent shareholders.

I believe that starting and building a business is an empowering, highly educational endeavor.  Like everything else in business, the more you know about your risks, the easier it will be to achieve your goals.