The Importance of Corporate Formalities
by Aaron Scott Young
Taking Care of Your Company
So you’ve incorporated. Now what? Incorporating offers the power of liability protection but the only way the courts enforce that benefit is if you treat the corporation like a corporation. Unfortunately, people incorporate and continue to treat the company as if it’s a sole proprietorship. Read the 10-most common mistakes.(link to other blog post)
Failure to maintain proper “Corporate Formalities” could lead to:
- Your corporate charter being revoked.
- Losing the personal asset protection your corporation provides.
- Paying tax penalties on unauthorized deductions.
- Having your company left in “bad standing” and out of compliance.
- Shareholders becoming personally liable for the corporation’s activities/debts.
- Allowing a creditor, the IRS or unscrupulous attorneys to eliminate the corporate protection of your company and seize your personal assets.
As a corporation owner you are required by law to follow Corporate Formalities. Some examples of corporate formalities include keeping the corporation in good standing in the state of incorporation, maintaining the stock ledgers properly, keeping your corporate minutes and corporate resolutions up-to-date.
Without proper Corporate Formalities, your business, your home, your personal investments, everything you incorporated to protect; could be wiped out overnight.
In the eyes of the law, it doesn’t matter if you are the sole person on the board of directors, the only officer and the only employee; small closely-held corporations are under the same legal obligations as big private companies. In fact, it is even more critical that you show separation between yourself and the company.
Who’s At the Greatest Risk – Understanding Separation?
In the case of Litchfield Asset Management v. Mary Ann Howell, the courts found that Antiquities Associates, LLC owned by Mary Ann Howell and her husband, is considered a disregarded entity and that the owners should be held personally liable to fulfill a debt of $657,207.38 plus interest. Mary Ann Howell had failed to separate her personal actions from that of the business. This caused the courts to eliminate the protection the LLC provides and allow the plaintiff to attack her personal assets.
The courts, creditors and IRS have found ever expanding reasons to hold directors, officials and shareholders personally liable for corporate responsibilities.
At Laughlin we’ve helped thousands of business owners maintain their corporate records. We’ve developed several powerful tools and numerous resources to help you maintain the liability protection your corporation should provide.
Related links:
10 Mistakes Made by Small Business Corporate Owners >
