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TIPS FOR MAINTAINING A CORPORATION
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Your New Year’s Resolution: Maintaining Corporate Resolutions!
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Starting with a Clean Slate. For most, the introduction of a New Year offers an opportunity to start fresh and “do it right.” For corporations and LLCs, the beginning of a new year has the same significance. Therefore, we have assembled the following brief (yet critical) set of tips to assist you in maintaining a healthy corporate status.
Why Must My Corporation Observe Corporate Formalities?
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One of the most important benefits derived from incorporating a business is the limited liability protection offered to corporate shareholders and directors. For example:
“Jerry, Incorporated” has a nationally syndicated talk show where guests can discuss their latest Bigfoot sightings. During a heated discussion, Steve (“Jerry, Incorporated’s” Bouncer/Security guard) injures a Geraldo (a talk show guest) while trying to restrain him and prevent him from throwing a chair into the audience. Assuming “Jerry, Incorporated” has a history of properly observing corporate formalities and has properly maintained its corporate records, Geraldo will NOT be able to sue any of “Jerry, Incorporated’s” shareholders, directors, or officers. Geraldo’s lawsuit will name “Jerry, Incorporated” as the defendant.
Thus, for a corporation to maintain it’s corporate status and thus protect its shareholders, directors, and officers from personal liability, the corporation must act like a corporation and not as a mere “front” or “alter-ego” for its shareholders, directors, and officers. Where a corporation fails to observe these formalities, it is possible for a plaintiff or other creditor (including the IRS) to “pierce the corporate veil” and hold individual shareholders and directors liable for corporate acts.
Tips for Maintaining Your Corporate Shield:
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Please observe the following “common-sense” tips to ensure that your corporation maintain its corporate shield:
•Display Your Corporate Indicator (“Inc.”, “Incorporated”, etc…) in Company Letterhead and other official corporate documents. In determining whether shareholders will be protected from personal liability, courts will often consider whether a plaintiff / creditor was aware that he or she was transacting business with a corporation. An excellent method for ensuring that suppliers, vendors, and customers are aware of your corporate status is to prominently display your corporate indicator in all of your company letterhead (e.g. Widgets, Incorporated).
•Include Your Official Corporate Title when Acknowledging Corporate Documents. Where an individual signs / acknowledges an official document without displaying his / her official corporate title (i.e. President, Secretary, Director, etc…), a court could interpret the signature as a personal guarantee thus exposing that officer / director to personal liability for the particular transaction. Therefore, when conducting corporate business, clearly display your corporate title (e.g., Tom Jones, President) in all official documents and correspondence including daily email correspondence, execution of contracts, interoffice memos, etc…
•Never Commingle Personal Funds with Corporate Funds. Where a corporation’s funds are commingled with the personal funds of corporate principals, the IRS or a court of law may hold corporate shareholders and directors personally liable. Thus, NEVER….NEVER use corporate funds to pay personal debts.
•Never Commingle Personal Assets with Corporate Assets. The rule provided in the paragraph above (“never Commingle Personal funds with Corporate Funds”) also applies to non-cash corporate assets. Therefore, the corporate yacht, for example, should not be used for personal, non-corporate use.
•Respect Your Corporation’s Individuality. Where several entrepreneurs share ownership in different corporations, each corporation must operate separately than the others…even if the director structure is the same between two of the corporations. Thus, each Directors’ meeting should be held separately for each corporation. In addition, each corporation should maintain separate corporate books.
•Maintain Current and Proper Corporate Records. Creditors, including the IRS, may challenge the validity of your corporate shield by showing that your corporate records were not properly created or maintained. Therefore, maintaining complete records of all director and stockholder meetings and storing them in a safe place is critical in maintaining your corporate shield.
•Keep Your Corporation In Good Standing. Although state laws vary with regards to annual reporting and filing requirements, most states will eventually force a corporate dissolution where that corporation fails to meet state reporting and filing requirements. A corporation that has been dissolved is no longer in existence and thus provides no protection to it shareholders and directors. To maintain good corporate standing, a corporation should observe the following:
(a) Pay all necessary Federal, State, County, and Business taxes, including franchise taxes.
(b) Never voluntarily dissolve a corporation with debts outstanding that could automatically be charged against shareholders.
(c) Pay your registered agent bills promptly.
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402 W. Broadway, Suite 400, San Diego, California, 92101, USA
Tel: (619) 595-3160 / Fax: (619) 330-4572
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