Attend to Your Corporate Housekeeping
By Nina Kaufman, Esq.Yes, they’re cumbersome, but don’t ignore the corporate formalities if you don’t want creditors poking into your personal assets.
Congratulations! You’ve taken the important step of protecting your personal assets by forming a corporation or limited liability company. But just as giving birth is only the beginning of your responsibilities of caring for a baby, so formation is only the beginning of your responsibilities of caring for your corporation.
Entrepreneurs often roll their eyes when it comes to corporate formalities such as holding an annual corporate meeting, electing officers and directors, and passing or adopting corporate resolutions. After all, they think, “It’s just me . . . why bother? Do I really need to sit down and have a meeting with myself? Why do I have to add this pesky paperwork to my already overloaded plate?”
The answer: It’s the law. If you want to be a corporation, you have to operate like one. If you don’t, you risk having all the benefits and privileges of the corporate form taken away from you. Those privileges include protection of your personal assets–which is why you formed a corporation in the first place, isn’t it? If you’re going to ignore the corporate form, the courts and your creditors will, too.
To avoid situations where courts can pierce the corporate veil to reach your personal assets, you need to do your corporate housekeeping. This includes the following:
- Maintain the corporate formalities. Most corporate laws require a corporation’s shareholders to meet annually, elect a board of directors, issue stock (share) certificates and prepare minutes of their meetings. Minutes are meant to reflect the significant decisions made on behalf of a corporation, such as adoption of or changes to bylaws, additions (or withdrawals) of directors, loans to or from shareholders, and major capital investments in equipment.
- Properly capitalize the corporation. In most states, a creditor can’t reach a business owner’s personal assets unless a case can be made that the corporation was “grossly undercapitalized.” Courts will look at factors such as a corporation’s cash flow, debt-to-equity ratio and financing sources. If you formed your corporation with $12 but racked up a bill for customized computer software costing thousands (with no way to pay for it other than corporate funds), you may find your creditors poking into your personal pockets for payment.
- Avoid commingling of funds. Keep your business and personal funds separate. Entrepreneurs run into serious problems when they try to use their personal account as their business account, claiming, “I can keep the bookkeeping separate. It’s not a big deal.” Wrong. It is. Writing a check to your hairdresser or gardener from the corporate account is also a no-no.
In many states, limited liability companies also have to do some basic housekeeping on at least an annual basis. From a legal perspective, an LLC may be a different type of business entity, but the limited liability “veil” could also be pierced if those formalities are not maintained.
Don’t let the word “minutes” fool you into thinking they are trivial. Ironically, they document some of the most important decisions your company will ever make. Make sure you create them under the watchful eye of your attorney. Minutes should be prepared when you form your business entity and annually thereafter.
If your corporate culture heeds these corporate housekeeping details, you’ll go a long way toward keeping creditors out of your personal pockets.
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