Corporate Formalities Protecting Personal Assets:
- In order to maintain personal
limited liability, it is essential these described actions be
avoided. Courts in recent years have found ever expanding reasons to hold directors, officials and shareholders personally liable for corporate responsibilities. Among other activities courts have found that may impose personal liability are improper corporate guarantees of loans or contracts benefitting an officer, timing of the sale of a controlling interest in the company for self-benefit, profiting from inside information, transactions with other businesses which may constitute conflicts of interest, unreasonable loans to company officials, and extension of unwarranted credit.
To fully retain the benefits of incorporating, you must observe corporate formalities
, even where the corporation is operated by a single shareholder, director, officer.
No matter how large or small a corporation is, the corporate laws view the management levels of a corporation as:
- Shareholder action and responsibility
- Board of Director action and responsibility
- Officer action and responsibility.
- Corporate Bylaws
- Minute Book
- Stock Ledger Book
- Business conducted in the Corporate Name
- Bank Accounts
The corporation must adopt a set of bylaws, which provide a written statement of how the internal affairs of the corporation will be handled. The bylaws set the time and place of regular shareholder meetings and meetings of the board of directors.
The corporate minute book contains a written record of actions by the shareholders and directors of the corporation. At a minimum, there must be annual minutes reflecting the election of directors by the shareholders. Any significant corporate activities, including corporate borrowings, purchases, and the payment of compensation to officers, should be properly reflected in the minutes of the meetings of the directors and shareholders.
Stock Ledger Book
The corporation must maintain a stock ledger book. This book shows who has been issued stock certificates and the amounts received by the corporation for the issuance of its stock. The stock ledger book contains an up to date record of the names and amount of shares owned by the shareholders.
Business to be conducted in the Corporate Name
When doing business with third parties, the officers and directors must make it clear that they are acting on behalf of the corporation and not in their own capacity. Correspondence should be sent out under the proper corporate letterhead, and contracts should be entered into only with the corporation as a signatory. Unless the documents clearly reflect that a transaction is entered into on behalf of the corporation and all necessary agreements are entered into under the corporation’s name, the corporate entity will not survive a challenge in a lawsuit.
Corporate bank accounts and accounting records must be separate and distinct from the individuals. A corporate bank account cannot be treated as if it were the account of an individual officer or director. Corporate income and assets must be separately accounted for on the books of the corporation. One of the biggest mistakes made by clients is that they feel free to move money and property back and forth between themselves and their corporation without properly accounting for such movement in the records of the corporation.
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