Corporate formalities are a term that would make any small business owner cringe. However, while corporate formalities might not be your favorite topic, failing to take them into account could cost you more than you could imagine.
Corporate Formalities and Personal Liability Protection
One of the main reasons that entrepreneurs elect to form a business entity has to do with the personal liability protections that are in place, in essence separating the assets of the business from the assets of the owner(s). And while this is one of the greatest benefits of forming a business entity, such as a corporation (C Corp or S Corp), the benefit is not absolute. Personal liability protection is something that you don’t have to think about after forming a corporation – but rather, something that should be considered throughout the life of the company. While I would rather not get too technical for this post to the point where your head starts to spin, your personal liability protection can be taken away from you through a process known as “piercing the corporate veil”.
List of General Corporate Formalities
While we will save the specifics of piercing the corporate veil for another post, one of the main ways that the corporate veil can be pierced is when a corporation fails to follow corporate formalities. Whether a corporation is regarded as a C Corp or an S Corp, the corporate formalities are nonetheless very similar, if not the same.
The following list, while may vary depending on what state you are in, are usually corporate formalities that your corporation should follow.
Your corporate bylaws are a set of internal rules governing how the corporation should be run.
The owner(s) of a corporation are known as shareholders. Shareholders are generally required to meet regularly (usually once a year).
Board of Director Meetings
The board of directors is a body of elected or appointed members that oversee the activities of a corporation. The board of directors, like the shareholders, are also generally required to meet regularly. In smaller companies, especially in companies that involve only one shareholder, board of director meetings are frequently not held. The reason for this is because, in these smaller corporations, all the shareholders are usually also members of the board of directors and think it is acceptable to only have a shareholder meeting. While, realistically, I see their argument, it is no excuse for not regularly having a board of directors meeting and could hurt you in the end if you don't.
Whether it is a shareholders meeting or board of directors meeting, you should accurately ensure that minutes of the meetings are being taken. This is also true if there is only one shareholder or one director – you should still take meeting minutes.
A corporation should regularly keep a stock ledger reflecting the stock ownership of the corporation. The ledger should list the names and addresses of the shareholders.
The financials of the corporation should not be mixed with the financials of the shareholders. The buzz word is “comingling” when it comes down to analyzing the financials of the corporation. A corporation must not have its assets commingled with its shareholders. A corporation should usually have a separate bank account and its shareholder should not use the corporate bank account to pay for their personal expenses.
A corporation, whether classified as a C Corporation or S Corporation has its own tax requirements that should be kept up to date. I frequently recommend all my clients get a good accountant to ensure their tax needs are being met.
Corporate formalities may not be the most exciting part of running a business. However, failing to follow them could lead to disastrous consequences. Speak to a corporate lawyer to ensure you are following all the required corporate formalities necessary for your specific business. Please feel free to contact us with any of your questions.
Julian Cordero is an Attorney, Music Producer, and Entrepreneur. Oh and he blogs too! Julian is licensed to practice law in New York and is the Managing Member of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property