A Note on The Importance of Corporate Formalities, Companies that don’t maintain them are Exposed to Legal Liability

So you've incorporated. Now what? Incorporating offers the power of liability protection for an individual’s personal assets to be separate and distinct from the company’s assets. In order to get this protection and the only way the courts enforce that benefit is if you treat the corporation like a corporation. Unfortunately, people incorporate and continue to treat the company as if it’s a sole proprietorship or their own personal entity rather than an entity separate from the person. 

As a corporation owner you are required by law to follow Corporate Formalities. Some examples of corporate formalities include keeping the corporation in good standing in the state of incorporation, maintaining the stock ledgers properly, keeping your corporate minutes and corporate resolutions up-to-date, and having proper governing documents (i.e. an operating agreement or corporate bylaws.

Remember, a key reason that business owners and managers choose to form a corporation or limited liability company (LLC) is so that they won't be held personally liable for debts should the business be unable to pay its creditors. But sometimes courts will hold an LLC or corporation's owners, members, and shareholders personally liable for business debts. When this happens it's called "piercing the corporate veil." In these tough economic times, many small business owners are scrambling to keep their companies afloat or are closing down.

If a corporation or LLC ends up having to shut its doors, the last thing a small business owner wants is to have to pay the business's debts. But when cash is tight and owners aren't careful, if an unpaid creditor sues for payment a court might "pierce the corporate veil" (lift the corporation or LLC's veil of limited liability) and hold the owners personally liable for their company's business debts. 

The corporate veil can be pierced if a court finds that the entity did not maintain proper corporate formalities, among other things. Nevertheless, maintaining corporate formalities is easy; yet, companies neglect to maintain them.  Failure to maintain proper "Corporate Formalities" could lead to:

  • Your corporate charter being revoked.
  • Using the company bank account as a personal expense account.
  • Failure to maintain corporate records.
  • Under capitalization.
  • Failure to keep the company in good standing.
  • Losing the personal asset protection your corporation provides.
  • Paying tax penalties on unauthorized deductions.
  • Having your company left in “bad standing” and out of compliance.
  • Shareholders becoming personally liable for the corporation’s activities/debts.
  • Allowing a creditor, the IRS or unscrupulous attorneys to eliminate the corporate protection of your company and seize your personal assets.

Without proper Corporate Formalities, your business, your home, your personal investments, everything you incorporated to protect; could be wiped out overnight.In the eyes of the law, it doesn’t matter if you are the sole person on the board of directors, the only officer and the only employee; small closely-held corporations are under the same legal obligations as big private companies. In fact, it is even more critical that you show separation between yourself and the company. Get your corporate documents organized before it is too late. You cannot get company protection if you do not act like a company.