After a corporation is formed, it becomes a separate legal entity from the business’ owners, who are then shielded from the company’s liabilities and losses. However, the corporation must continually observe certain operating guidelines and procedure — otherwise known as “corporate formalities” — in order to maintain those protections for its owners.
Business must engage in corporate formalities to ensure that the company remains legally distinct and separate from its owners. LegalMatch summarizes the process as “keeping separate records for corporate activity, holding regular meetings for corporate directors, and maintaining a financial independent account for the corporation.”
Horenstein Law Group
The attorneys at Horenstein Law Group caution small business owners that they risk running afoul of the law if and when they make decisions affecting their shareholders — for example, taking out loans or entering into other agreements — without following corporate formalities.
It’s best to be prepared, rather than finding out too late that your company hasn’t adhered to the law. If, for example, a larger company acquires your business, they’ll perform their due diligence and likely discover if your director has failed to comply with corporate formalities, such as holding regular shareholder meetings and documenting those meetings.
This means you also risk “piercing the corporate veil” — “a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts.”
Corporate cleanups for mistakes and oversights can be extremely expensive. Following corporate formalities limits your risk of violating your fiduciary duties and fiduciary obligations.
Contact Horenstein Law Group today to discuss how your business may be affected by corporate formality requirements and how our experienced business attorneys can protect you and your company.
The specific requirements regarding corporate formalities depend on state and municipal laws as well as the type of business. Furthermore, there are internal (i.e., organizational) procedures, standards, and bylaws that must be followed, such as making sure that all the appropriate and necessary sign-offs are there.
In general, corporate formalities include the following:
- Holding regularly scheduled meetings
- Holding special meetings when necessary
- Maintaining accurate records
- Fiduciary duties
- Fiduciary obligations
- Creating a business plan
The reason business owners create a separate legal entity — a limited liability company (LLC)\, for example — is to insulate themselves from the company’s business liabilities and losses. For many small businesses, however, the temptation exists to use company money as a sort of personal piggy bank by not documenting the withdrawal of money as salaries, distributions, or guaranteed payments. This is just one of the ways to “pierce the corporate veil,” thereby exposing the owners themselves to company losses and liabilities.
The owners of small businesses and family-run companies aren’t always aware of corporate formalities that are statutorily imposed upon them. But ignorance of the law is no defense.
Horenstein Law Group can help you get a handle on all your company’s responsibilities. We provide so-called corporate cleanup services, which are especially helpful following a merger or acquisition. We’ll even craft a handy checklist based on your company’s specific needs and requirements.
Partnering with an attorney at Horenstein Law Group is the best way to stay on top of all that is legally required of you and your company. Contact Horenstein today to get started.