One of the main advantages of incorporating is that the shareholders personal assets are protected from creditors of the corporation. In other words, the corporation provides a limited liability status.
However, to maintain limited liability status, corporate formalities must be observed. Failure to follow corporate formalities or to keep adequate records and minutes of meetings can result in the loss of the corporation's status as a separate entity and of your limited liability status.
Where corporate formalities are not observed, shareholders may be held personally liable for corporate debts. Among other things, Corporations must observe certain formalities such as:
- hold annual shareholders' and directors' meetings;
- keep minutes of shareholders' and directors' major decisions;
- make sure that corporate officers and directors sign documents in the name of the corporation;
- maintain separate bank accounts from their owners;
- keep detailed financial records; and
- file a separate corporate income tax return.
Therefore, if funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.
It is important that over the course of years your corporate minute book is professionally prepared and kept up to date. If it has been neglected, it may be too late to have this work timely done when you need it the most.
Although corporate formalities can be exercised without the assistance of an attorney, it may be wise to consider counsel who is familiar with the proper procedures, formats and time restraints required. Any failure to comply with all of the corporate formalities may prove fatal to the validity of the corporation.
Accordingly, you may wish to consult with an attorney when observing the corporate formalities. John Kokolakis and his support staff at Kokolakis & Associates, P.C. are readily available to meet with you to discuss your particular concerns, needs and desires. Please contact our office if you have failed to maintain your corporate minute book or you need assistance in preparing the minutes of the corporate meetings and records on an annual basis. Remember, you can save significant money by avoiding potential personal liability, litigation and attorney fees for the limited fees in maintaining proper corporate formalities.