Many people form business entities to go about a variety of revenue-generating activities, whether it’s owning and operating a business focused on selling products or services, or engaging in other activities such as owning residential, commercial or vacation rental properties.
One of the rights enjoyed by owners of business entities, both corporations and limited liability companies (LLCs), is that owners are not normally held personally liable for the acts of the business and its employees, officers, directors or managers. These rights assume that the business entity is involved in legitimate, lawful business activities, and that it operates with steadfast regard to a set of operating principles known as corporate formalities.
When business owners fail to maintain corporate formalities for their business, they can actually risk the protection normally accorded by corporate entities. In fact, they may be liable in multiple ways, including the vulnerability of personal assets, when a creditor is able to pierce the corporate veil. For the courts, an improperly maintained business entity can mean that the business and the person become one and the same.
Let’s take a look at some of the corporate formalities that make up a list of actions imperative to maintaining the corporate shield. While these formalities may vary slightly from state to state (and LLCs typically have a less complex set of formalities than corporations), following them in both the letter and spirit of the law keeps the business and individual protected and aligns the company with sound business practices.
Annual Meetings – A corporation is obligated to hold at least one shareholder meeting per year for the purpose of electing a board of directors for managing the company’s interests for the next fiscal year and memorializing certain other business activities. These meetings require minutes kept by the secretary of the corporation, to be maintained in the corporation’s minute book. In most states, LLC’s are not required to hold annual meetings, but it is still advisable to do so in order to provide evidence that the business is operated separate from the owner(s).
Board/Manager Meetings – The aforementioned board of directors should hold regular meetings, where they discuss company business and vote on major decisions of the corporation pursuant to the corporation’s bylaws. As with shareholders’ meetings, the minutes of all board meetings should be recorded and maintained in the corporation’s minute book. LLC Managers should hold meetings in the manner stated in the LLC Operating Agreement, and should document business decisions with minutes.
Bank Accounts – Owners should hold financial assets in separate bank accounts in the name of the corporation or LLC, never commingling business assets with the owners’ personal assets.
Financial and Business Records – Business owners, whether they are maintaining rental properties or operating a traditional business, must keep accurate financial records, as well as records of all activities of the business.
Business Name – Business related to the company must be conducted in the name of the company, aligning with the business name as it appears on formation documents filed in its home state. Any outsider reviewing the activities of the business should see a clear pattern of officers of the business acting on behalf of the corporation and not serving their own interests. Owners, Managers, Officers and Directors should always sign their names using their official title when executing documents on behalf of the business.
Independence Among Corporations – Sometimes, it may be necessary or advisable for an owner or group of owners to create multiple entities. For example, a physician practice may often be comprised of multiple business entities (an operating company providing medical services, a separate entity to own the office/building, and a third entity to own the equipment used in the operating business – the operating entity leases the office space and equipment from the other entities). These corporations, while having common ownership, must operate independently, and corporate formalities like meeting minutes and financial records must be maintained separately for each entity.
Protecting the corporate veil through strident adherence to corporate formalities isn’t just sound business; it’s also a cornerstone of personal asset protection and optimized estate planning. For more information on maintaining your company’s veil of protection, contact Howes Law and ask about our Corporate Shield service, which effectively maintains your corporate formalities in compliance with the law.