March 15th and April 15th are two dates that most businesspeople in the United States know mean federal tax time. Reviewing business records for tax time reminds me of problems that I see frequently with small and medium businesses. People frequently create a corporation or limited liability company with one or a few shareholders or members in order to protect their personal assets from problems the business may encounter.

This strategy can be very effective. Suppose that “Charles” has invented a new type of desk chair and he has received a patent for it. He wants to start making them, but is afraid that if one breaks and someone is hurt, he will be sued. So he creates a company with his friend “Danny,” Charles’ Chairs Inc., where they are the sole shareholders. Since the only real asset that Charles’ Chairs Inc., would have is the patent, instead of assigning the patent to Charles’ Chairs, he creates another company, Charles’ Patents LLC, and assigns the patent to it. Charles is the sole member of Charles’ Patents LLC.

If anyone buys a Charles Chair and is hurt, the only “person” to sue is Charles’ Chairs Inc., which has almost no assets – just