A corporation is a legal entity that is separate from its shareholders, officers, directors and employees. Every corporation is required to maintain certain corporate formalities that will preserve the corporation’s status as a separate legal entity, and therefore, insulate its shareholders from personal liability. Generally, a creditor of the corporation will be unable to recover from the corporation’s shareholders, directors and officers for a corporate debt or other corporate obligation without “piercing the corporate veil.” Creditors may, however, “pierce the corporate veil” if the corporation does not maintain proper corporate formalities.
Every state has certain laws that provide corporate formality guidelines that shareholders, directors and officers must follow. Some of the most basic corporate formalities include having annual meetings of the shareholders and directors of the corporation. Corporations must have at least one shareholders meeting each year (or a written consent in lieu of such meeting), where the shareholders elect the board of directors for the following year. Corporations must also have a directors’ meeting each year (or written consent in lieu of a meeting) where the directors elect officers of the corporation for the following year.
Significant corporate actions should be documented and confirmed by the shareholders and directors during annual meetings, including, but not limited to, loans to or from the corporation, purchases of real estate, leases of property, purchases of a significant amount of personal property or equipment, and any other significant matter regarding the operations of the corporation.
- The following are corporate formalities that should be maintained to protect your corporation’s status as its own legal entity and protect you from potential personal liability:
- Maintain adequate capital in the corporation to meet all current and foreseeable debts.
- Maintain adequate liability insurance necessary for your type of business.
- Do not guarantee the debts of the corporation unless it is required to obtain loans, financing, etc.
- Do not offer to personally pay corporate debts.
- Do not commingle corporate and personal funds by placing any corporate funds in personal accounts.
- Obtain appropriate authorizations from the board of directors for any and all corporate loans to the shareholders, officers or directors of the corporation.
- Do not use corporate assets for personal use unless the board of directors of the corporation authorizes such use.
- Do hold regular meetings of the shareholders and board of directors of the corporation, and keep written documentation of the proceedings of these meetings.
- Do display the name of the corporation on all correspondence and sign your name as a corporate officer, and not individually.
The above is not an exhaustive list of all corporate formalities that should be maintained to protect your corporation’s status as its own legal entity and protect you from potential personal liability, however the above actions should become habit for the shareholders, directors and officers of your corporation.
Maintaining corporate formalities is not difficult, however, daily issues do arise. A trusted attorney familiar with corporations and corporate formalities can advise you on maintaining proper corporate formalities and protecting you from personal liability.