Keeping up with the Corporate Formalities: How to Ensure the Long-Term Viability of the Protection that Comes from Incorporating your Business
If you’re running a business that’s in a corporate model, it is extremely important that you keep up with the corporate formalities. These “formalities” are more than just formalities. They are what keep you within the protection of a corporation status and protect you from creditors.
Formalities are important for LLCs and corporations, although the formalities for corporations are more strictly enforced. So if you’re formed as a corporation, whether for profit or non-profit, read on.
Before we begin, what are some of the dangers you’re trying to avoid by keeping your corporate form strong? First, you want to avoid anyone being able to “pierce the veil” of corporate form. This means you don’t want a creditor, shareholder, director, employee, or anyone else to be able to make a claim against the company that will go against the shareholders or owners personally. Ordinarily, the corporation is a separate “legal person”—that is, it has an identity completely separate from its shareholders, officers, and directors that prevents any claim against the corporation from reaching those people. But this is not a perfect protector. Courts will allow “piercing” —going past the corporate personhood to reach shareholders, directors, or officers directly—to happen where a business has not kept up its corporate formalities.
Second, you want to ensure the corporation is well prepared to defend against derivative shareholder lawsuits or claims by disgruntled directors on the board. By keeping up with corporate formalities, you ensure that your organization is loaded with ammunition if and when these challenges occur.
Third, you want to ensure your corporation is set up for long term corporate growth and to take advantage of new opportunities as they present themselves. Keeping up with your corporate formalities allows you to do all these things.
Keep Meeting Minutes and Resolutions
All corporations must have bylaws. As part of these bylaws, the corporation’s shareholders—even if there are only a few—must have meetings, at least annually. When the corporation first begins, there must be a resolution of the shareholders to appoint the first directors. This, and all resolutions, must be in writing and voted upon. There must be a record of the vote, and the resolution with the voting record and signatures should be retained in your records.
At each annual meeting, treat it like a serious event. Record everything that is discussed, and have a plan in advance to discuss everything, including things like financial reports. These are called the “minutes,” and you should retain these minutes for your records.
Keep Separate Bank Accounts and Don’t Mix Corporate Purposes
Ensuring that your companies really do act separately from their shareholders will keep you from claims that your companies are merely “alter egos” of the shareholder. When it comes to having several entities in the same corporation or having subsidiary companies for differing purposes, it’s important to ensure you are keeping all of your companies separate. This means keeping separate bank accounts, using employee time between companies in an appropriate way, and ensuring legal separation. Depending on the nature of risk of a specific business venture some or all of these factors may be more or less important.
Actually Appoint Directors and Officers
A corporation must always have a board of directors, and the board of directors must appoint officers. In Pennsylvania, the minimum number of directors is three. The board then appoints (and removes) a president, vice president, secretary, and treasurer, who all have roles. Now, the directors and officers don’t need to be outsiders or specialists. The shareholders can serve as the directors and officers, especially if you have a small corporation.
Certain decisions must be made by a vote of the shareholders, even if all the shareholders agree. These include things like merging with another company or dissolving the company. Keep records of all these votes.
While not strictly necessary, it is good for your company to issue formal stock certificates to its shareholders and to keep a log of these issued shares to prove who the shareholders are.
Keeping up with corporate formalities is no joke, and it’s extremely important. The difficulties of corporate formalities are just one of many reasons that we encourage clients to set up LLCs. But corporations have important benefits too, and if you’re trying to keep up with the rules, we can help! Contact the corporate attorneys at Cornerstone Law Firm for more information and a consultation on your business needs.