German philosopher Gotthold Ephraim Lessing once said that “for me the greatest beauty always lies in the greatest clarity.”
It follows, then, that drafting a beautiful and adequate business purpose for your company requires a certain degree of clarity. Regrettably, Lessing would be much disappointed with the way most business purposes are written today.
In fact, the oft-neglected business purpose, much to the dismay of Lessing, has many-a-times been reduced to the following five word sentence: “Any and all lawful business.”
Neither clear nor beautiful.
Rhetoric aside, though, defining your business purpose with sufficient clarity actually serves a purpose beyond the actual business purpose itself. Notably, a well written business purpose, drafted with the utmost care and attention to detail, is paramount to protecting your business assets and interests.
In other words, drafting a proper business purpose is just one piece — albeit a minor piece — that fits nicely into the entire asset protection puzzle. It is this game, however, that a creditor or plaintiffs’ attorney loves to play, and finding the piece that does not quite fit can doom the asset protection plan for the business all together.
To make things worse, the creditor has at its disposal plentiful and powerful tools that will be used to attack your personal finances vis-à-vis the business. One such tool is the doctrine of veil piercing.
Also known as piercing the corporate veil, this equitable remedy allows a creditor to pierce the liability protection offered by the corporate form and reach the individual’s personal assets. In essence, the creditor will attempt to convince the court that there is a unity of interest, control and ownership between the business owner and the business itself, such that there really is no separate and distinct business entity.
The alter ego argument stands for exactly that: the business is a sham and is otherwise nothing more than an extension, or alter ego, of yourself. In other words, there is no business purpose.
Without delving too far into the intricacies of the doctrine, suffice it to say that a creditor will seek to test the legitimacy of your company’s business purpose by analyzing it with a fine-toothed comb. Likewise, courts will do the same, at the behest of the creditors, and make a determination on whether there exists an actual business purpose.
Thus, depending on the circumstances, your canned “any and all lawful business” purpose may not fair so well. This catch-all type clause may be used against you in a way that supports a creditor’s alter ego argument by evidencing the lack of a true and actual business purpose.
This is why your business purpose needs to be specific and clear. For example, if your LLC holds rental property, state that its purpose is to own, operate, manage and maintain the rental property, and in furtherance of that purpose, the LLC will engage in any and all lawful business, in a way that the member or manager deems necessary.
Of course, you’ll want to be more specific than this, and the reasons you started the business entity in the first place, including what you hope to accomplish with it, should be stated outright.
In this way, a Lessing type business purpose — that is, one that reflects clarity — may thwart a creditor’s alter ego argument or, at the least, make the burden of proving it more difficult, thus diminishing its chances at piercing the corporate veil. As such, a well drafted business purpose will serve your asset protection interests as well.
Note, though, that the ambitious creditor will most likely have other arguments in support of its veil piercing theory; for example, failure to observe corporate formalities (link in Spanish). This is why it is best to plan for the worst and attempt to limit the arguments a creditor can use against you.
One way to do this is to write a beautiful business purpose.