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So, How Important are Corporate Formalities Anyway?

Typically, one of the most prevailing reasons that a business owner decides to incorporate their business is to shield them from or limit their personal liability for the debts and obligations of the business. While this is an important first step, simply forming a corporation or a limited liability company is generally not enough to maintain maximum personal protection from business liability. Business owners who have incorporated or formed limited liability companies must also be diligent in maintaining the corporate formalities of their entity.  Failing to do so could result in a plaintiff attempting to “pierce the corporate veil” of the entity and hold the owner personally liable for the debts, obligations, or liabilities of the entity.   Maintaining the corporate formalities is equally as important (and quite possibly even more important) when the entity only has one owner.  It is not uncommon for single member LLCs or sole shareholder corporations, to become lax in the record keeping of the entity, particularly when there are not other owners holding either accountable for properly maintaining the entity’s records, policies, and procedures.  Though not an exhaustive list by any means, below are a few points that every owner of an entity should keep in mind when it comes to maintaining the corporate formalities of his or her entity:

  • Ensure that the entity was properly formed from the beginning and that all of the required governing documents (i.e. bylaws, company agreements, minutes or consent of organizational meeting, etc.) are present and fully executed
  • Hold annual meetings as required in the entity’s governing documents
  • Hold any officer, director, or manager meetings and elections as required in the entity’s governing documents
  • Hold special meetings as required in the entity’s governing documents when addressing critical entity matters
  • Maintain accurate and complete records and minutes of company meetings
  • Do not commingle company and personal funds
  • Do not use corporate accounts to pay for personal expenses and vice versa
  • Do not make loans to or take out loans from the company unless specifically permitted in the governing documents of the entity, and if permitted, only in strict compliance with the requirements of the governing documents.
  • Ensure that owner or entity’s CPA is timely filing any required state, federal, and local (if applicable) taxes and reports.
  • Maintain all records and corporate documents for the entity in the entity’s corporate book.

Eric R. Thiergood, Sr.

Phone: 281-367-1222

Fax: 281-210-1361

[email protected]

 

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