The limited personal liability of a corporation isn't iron clad. In the event the business ends up owing more money to a creditor than it has the ability to pay, the creditor will then look to the business owner. Under a legal theory known as "piercing the corporate veil," if the business was not properly conducted as a corporation, a court may determine that the corporate form is just a sham and hold the business owners personally liable.
It is possible to prevent this from happening to your corporation. Just make sure you conduct business as a corporation would. A Litchney law firm business attorney can also help keep you on track.
Follow the rules.
The state you are incorporated in, as well as any other state you do business in, will have requirements that you should comply with. Every year you will have to file a form indicating any changes in the directors and officers of your corporation. You must also keep current a registered agent for your business with the state. Filing these documents in a timely fashion shows that your business is really operating as a corporation.
You should also follow the rules of the corporation, known as the Bylaws. These will specify how and when shareholders' and directors' meetings are to be held. It is important to have these meetings. Any major business decisions, such as taking on a large debt, merit a board of directors meeting. This doesn't have to be anything more than a brief meeting where all of the directors sign a copy of the minutes with a resolution documenting what the decision is. The meeting can also be conducted via conference call and faxes, if all of the directors can't get together in the same place.
Keep Corporate Records.
You should keep a corporate record book that contains your stock ledger, minutes of shareholders' and directors' meetings, copies of corporate filings, and any other corporate records. This record keeping is further evidence that you have been operating your business as a corporation.
Make Sure Others Can Tell That the Business is a Corporation.
This is one of the most important aspects of protecting yourself from personal liability. It is one thing for a creditor to claim that you should be responsible if he thought he was dealing with you as an individual business owner. It is a much harder claim to make if it should have been obvious to the creditor that your business was a corporation.
Make sure to use your full business name in business dealings. For example don't enter into a contract simply as J. Smith Enterprises. Make sure the contract says J. Smith Enterprises, Inc. When you sign the contract don't sign it John Smith, sign it as J. Smith Enterprises, Inc. by John Smith, President. The other party to the contract will have a hard time claiming that it didn't know it was dealing with a corporation that way.
Keep Business and Personal Finances Separate.
This is another key factor in protecting the corporation. You must keep the finances of the corporation separate from your own. The corporation should have its own bank account. Business expenses, including your salary, should be paid from the corporate account. Likewise, you should not pay for personal expenses from the business account. If you want to take profit from the corporation to spend on personal items, you will have to declare a dividend.
If you are not used to conducting business as a corporation, it may seem like a lot to keep track of, but conducting the business properly can protect you from personal liability. A lawyer who practices in the area of business law, can lead you through the legal requirements to properly conduct your corporate business.
The most important thing to know about operating a corporation is to leave a paper trail of the important business activities. Below are some of the most common issues to consider when maintaining your corporation.
1. Keep things separate
As previously mentioned, it's important to keep the business and affairs of the corporation separate from the personal affairs of the stockholders, directors and officers. This means setting up a separate bank account, maintaining separate records, and keeping separate books for accounting purposes.
2. Meetings
Directors need to hold periodic meetings, and shareholders must meet once per year to elect directors. Meetings can take place in person or by telephone. Either way, you need to make a written record of the items discussed and actions approved at the meetings. Alternatively, you can just get all the directors (or a majority of the stockholders) to sign a statement approving corporate actions. This is known as "written consent."
3. Transfer of ownership interests
Generally, as long as all applicable laws are followed, a stockholder is free to sell or transfer shares to anyone. However, with small corporations in which the stockholders act more like partners and each is integral to the success of the company, you may wish to consider placing restrictions on the transfer of shares.
Stockholders sometimes enter into a buy-sell agreement which sets the terms for when shares can be transferred or sold. A typical buy-sell agreement would state that if one stockholder seeks to sell shares to any third party, the other stockholders have a right of first refusal; that is, the other stockholders may purchase those shares at the same price. Only if the other stockholders do not purchase those shares can a stockholder sell to a third party.
Additionally, certain professional corporations can only have shareholders that are licensed professionals, limiting the transferability of shares.
4. Tax forms and licenses
Every corporation must obtain a federal tax identification number, which is similar to an individual's social security number. Some states also require a separate state tax number. In addition, state, county and city business licenses may be required. Please check with your city and county to see which types of licenses you need.
Compliance regulations established by state regulators are required for business owners who have formed various business entities. Most business owners are unaware of these strict compliance regulations and fail to perform even the most basic actions required to safeguard their corporate veil and keep their business entity in good standing with the state. Statistics show that because of this, 80-85% of business owners, particularly small business owners, are left personally vulnerable to frivolous creditors, lawsuits and liens. In addition, 95% of corporate veils are pierced when courts determine that shareholders have disregarded the legal separateness of the corporation. It is vital to note that there are serious repercussions if the ongoing requirements that Corporations and LLC's have are not met.
Whether you already have formed a business entity, or if you are thinking about it, ask yourself what is currently being done to ensure your entities meet statutory regulations. Has a proper chain of authority been established, or are you running your companies as an alter ego? Do you have a current and complete corporate record book, including required ownership reports? Are your business entities currently in good standing with the State?
The theory behind having a corporation or LLC is that they are legal entities that operate separately from their owners. However, if your business does not perform all of the necessary requirements that show it is acting like a corporation or LLC like filing annual reports, paying annual fees in a timely fashion, holding and properly documenting necessary meetings, etc then a court of law may find it appropriate to pierce the corporate veil. When this happens, a business is considered to be operating not separately from its owner, but more like a sole proprietorship rather than a corporation or LLC. As a result your personal assets will no longer be protected, and you may lose everything.
ABOUT THE “CORPORATE VEIL”:
As you may already know, one of the most important benefits of incorporating or organizing a formal business is being able to enjoy and feel protected by the personal liability protection the entity provides. A corporate veil is designed to shield your personal assets in the event your business is found liable for lawsuit judgment, liens, or collection of outstanding debts.
However, your corporate veil only works to keep your personal assets from reach of these judgments if your businesses are maintained properly and the proper formalities are regularly observed. For example, factors such as fraud can lead a court to decide to pierce your corporate veil, but in the absence of such clear cut violations courts look to compliance factors and your good faith attempt to help establish the validity of your corporation and its veil.
REQUIREMENTS:
The requirements can be grouped into two categories: internal and external. Internal requirements are those actions that must be taken from within the business entity by the directors and shareholders or members and managers respectively, must be well documented and kept with the company records. External requirements are those required by the State in which the business entity is formed or foreign qualified; examples include annual state filing fees.
The most commonly overlooked requirements are internal. Corporations as you may be aware, have the strictest requirements, including holding initial and annual meetings of directors and shareholders, adopting and maintaining updated bylaws, issuing stock to shareholders and recording any subsequent stock transfers. These requirements are not required per se for LLC’s, but it is still highly recommended to adopt and maintain an updated operating agreement, issue membership shares, record any subsequent interest transfers and hold annual meetings of the members or managers in order to maintain separateness from the individuals.
Common external requirements are annual (or biennial in some states) statements or reports, which allows states to keep updated information on corporations and LLC’s formed or qualified there. Typically states require a fee to be paid when these statements are returned to the state; these vary by state, entity type and range typically from under $10.00 to over $300.00.
Some States, such as California, also have a Franchise Tax, payable to the Franchise Tax Board, which is a fee paid to the state for the privilege to operate as a corporation or LLC formed or qualified in California. There are different formulas for calculating this tax, based on the Corporation of LLC’s revenue or a Corporations number of authorized shares and par value.
The due dates for annual statements and franchise taxes also vary by state. Since the annual statements and franchise taxes represent ongoing requirements Corporations and LLC’s face, and can change, it is advisable for business owners to make specific note of this compliance so as not to fall behind on just some of their external requirements, subjecting them to potential liability.
Other such requirements that may be required include: holding an organizational meeting to elect directors and officers, adopting bylaws, issuing shares of stock, adopting banking resolutions, holding shareholders’ and board of directors’ meetings on a regular basis, and taking minutes at board meetings and make them available to shareholders.
All of these requirements can be confusing and are time consuming. In addition, you cannot afford to get behind on them. You spent the time and money forming your business now you need someone who understands compliance formalities well enough to ensure your businesses protection and peace of mind.
The Litchney Law Firm is capable of offering the following services for you:
- Tracking and notification of required state filings
- Validation of your company’s current status with the State
- Generation of required compliance report forms
- Documentation forms for official meeting notices and minutes
- Alerts to notify you of meaningful events pertaining to your company based on the states in which your company is formed and if applicable, qualified to do business.
- We will alert you to critical dates and will also provide you with most of the forms that you need in order to stay in compliance, pre-populated with much of the data pertaining to your company which will save you time!
The Litchney Law Firm understand the complexities of keeping a corporation or LLC compliant, we can keep track of and notify you of critical compliance events, and provide access to important forms needed to properly document them. We will notify you when your state annual reports are due. All these alerts are conveniently emailed to you or anyone else you choose to be associated with your business.
Compliance requirements monitoring is available for clients who form their business entities with the Litchney Law Firm. Special pricing is offered to existing clients, but non existing clients may sign up as well.
If you are interested in purchasing this helpful service to keep your corporation or LLC intact, please contact us today and we will get you set up.
For further information or to discuss your business and corporate law issues, we invite you to schedule a free confidential consultation with an experienced northern and southern California business law attorneys by calling us at 916.983.2941, or filling out our contact us form on our website. The confidential consultation is free.
The limited personal liability of a corporation isn't iron clad. In the event the business ends up owing more money to a creditor than it has the ability to pay, the creditor will then look to the business owner. Under a legal theory known as "piercing the corporate veil," if the business was not properly conducted as a corporation, a court may determine that the corporate form is just a sham and hold the business owners personally liable.
It is possible to prevent this from happening to your corporation. Just make sure you conduct business as a corporation would. A Litchney law firm business attorney can also help keep you on track.
Follow the rules.
The state you are incorporated in, as well as any other state you do business in, will have requirements that you should comply with. Every year you will have to file a form indicating any changes in the directors and officers of your corporation. You must also keep current a registered agent for your business with the state. Filing these documents in a timely fashion shows that your business is really operating as a corporation.
You should also follow the rules of the corporation, known as the Bylaws. These will specify how and when shareholders' and directors' meetings are to be held. It is important to have these meetings. Any major business decisions, such as taking on a large debt, merit a board of directors meeting. This doesn't have to be anything more than a brief meeting where all of the directors sign a copy of the minutes with a resolution documenting what the decision is. The meeting can also be conducted via conference call and faxes, if all of the directors can't get together in the same place.
Keep Corporate Records.
You should keep a corporate record book that contains your stock ledger, minutes of shareholders' and directors' meetings, copies of corporate filings, and any other corporate records. This record keeping is further evidence that you have been operating your business as a corporation.
Make Sure Others Can Tell That the Business is a Corporation.
This is one of the most important aspects of protecting yourself from personal liability. It is one thing for a creditor to claim that you should be responsible if he thought he was dealing with you as an individual business owner. It is a much harder claim to make if it should have been obvious to the creditor that your business was a corporation.
Make sure to use your full business name in business dealings. For example don't enter into a contract simply as J. Smith Enterprises. Make sure the contract says J. Smith Enterprises, Inc. When you sign the contract don't sign it John Smith, sign it as J. Smith Enterprises, Inc. by John Smith, President. The other party to the contract will have a hard time claiming that it didn't know it was dealing with a corporation that way.
Keep Business and Personal Finances Separate.
This is another key factor in protecting the corporation. You must keep the finances of the corporation separate from your own. The corporation should have its own bank account. Business expenses, including your salary, should be paid from the corporate account. Likewise, you should not pay for personal expenses from the business account. If you want to take profit from the corporation to spend on personal items, you will have to declare a dividend.
If you are not used to conducting business as a corporation, it may seem like a lot to keep track of, but conducting the business properly can protect you from personal liability. A lawyer who practices in the area of business law, can lead you through the legal requirements to properly conduct your corporate business.
The most important thing to know about operating a corporation is to leave a paper trail of the important business activities. Below are some of the most common issues to consider when maintaining your corporation.
1. Keep things separate
As previously mentioned, it's important to keep the business and affairs of the corporation separate from the personal affairs of the stockholders, directors and officers. This means setting up a separate bank account, maintaining separate records, and keeping separate books for accounting purposes.
2. Meetings
Directors need to hold periodic meetings, and shareholders must meet once per year to elect directors. Meetings can take place in person or by telephone. Either way, you need to make a written record of the items discussed and actions approved at the meetings. Alternatively, you can just get all the directors (or a majority of the stockholders) to sign a statement approving corporate actions. This is known as "written consent."
3. Transfer of ownership interests
Generally, as long as all applicable laws are followed, a stockholder is free to sell or transfer shares to anyone. However, with small corporations in which the stockholders act more like partners and each is integral to the success of the company, you may wish to consider placing restrictions on the transfer of shares.
Stockholders sometimes enter into a buy-sell agreement which sets the terms for when shares can be transferred or sold. A typical buy-sell agreement would state that if one stockholder seeks to sell shares to any third party, the other stockholders have a right of first refusal; that is, the other stockholders may purchase those shares at the same price. Only if the other stockholders do not purchase those shares can a stockholder sell to a third party.
Additionally, certain professional corporations can only have shareholders that are licensed professionals, limiting the transferability of shares.
4. Tax forms and licenses
Every corporation must obtain a federal tax identification number, which is similar to an individual's social security number. Some states also require a separate state tax number. In addition, state, county and city business licenses may be required. Please check with your city and county to see which types of licenses you need.
Compliance regulations established by state regulators are required for business owners who have formed various business entities. Most business owners are unaware of these strict compliance regulations and fail to perform even the most basic actions required to safeguard their corporate veil and keep their business entity in good standing with the state. Statistics show that because of this, 80-85% of business owners, particularly small business owners, are left personally vulnerable to frivolous creditors, lawsuits and liens. In addition, 95% of corporate veils are pierced when courts determine that shareholders have disregarded the legal separateness of the corporation. It is vital to note that there are serious repercussions if the ongoing requirements that Corporations and LLC's have are not met.
Whether you already have formed a business entity, or if you are thinking about it, ask yourself what is currently being done to ensure your entities meet statutory regulations. Has a proper chain of authority been established, or are you running your companies as an alter ego? Do you have a current and complete corporate record book, including required ownership reports? Are your business entities currently in good standing with the State?
The theory behind having a corporation or LLC is that they are legal entities that operate separately from their owners. However, if your business does not perform all of the necessary requirements that show it is acting like a corporation or LLC like filing annual reports, paying annual fees in a timely fashion, holding and properly documenting necessary meetings, etc then a court of law may find it appropriate to pierce the corporate veil. When this happens, a business is considered to be operating not separately from its owner, but more like a sole proprietorship rather than a corporation or LLC. As a result your personal assets will no longer be protected, and you may lose everything.
ABOUT THE “CORPORATE VEIL”:
As you may already know, one of the most important benefits of incorporating or organizing a formal business is being able to enjoy and feel protected by the personal liability protection the entity provides. A corporate veil is designed to shield your personal assets in the event your business is found liable for lawsuit judgment, liens, or collection of outstanding debts.
However, your corporate veil only works to keep your personal assets from reach of these judgments if your businesses are maintained properly and the proper formalities are regularly observed. For example, factors such as fraud can lead a court to decide to pierce your corporate veil, but in the absence of such clear cut violations courts look to compliance factors and your good faith attempt to help establish the validity of your corporation and its veil.
REQUIREMENTS:
The requirements can be grouped into two categories: internal and external. Internal requirements are those actions that must be taken from within the business entity by the directors and shareholders or members and managers respectively, must be well documented and kept with the company records. External requirements are those required by the State in which the business entity is formed or foreign qualified; examples include annual state filing fees.
The most commonly overlooked requirements are internal. Corporations as you may be aware, have the strictest requirements, including holding initial and annual meetings of directors and shareholders, adopting and maintaining updated bylaws, issuing stock to shareholders and recording any subsequent stock transfers. These requirements are not required per se for LLC’s, but it is still highly recommended to adopt and maintain an updated operating agreement, issue membership shares, record any subsequent interest transfers and hold annual meetings of the members or managers in order to maintain separateness from the individuals.
Common external requirements are annual (or biennial in some states) statements or reports, which allows states to keep updated information on corporations and LLC’s formed or qualified there. Typically states require a fee to be paid when these statements are returned to the state; these vary by state, entity type and range typically from under $10.00 to over $300.00.
Some States, such as California, also have a Franchise Tax, payable to the Franchise Tax Board, which is a fee paid to the state for the privilege to operate as a corporation or LLC formed or qualified in California. There are different formulas for calculating this tax, based on the Corporation of LLC’s revenue or a Corporations number of authorized shares and par value.
The due dates for annual statements and franchise taxes also vary by state. Since the annual statements and franchise taxes represent ongoing requirements Corporations and LLC’s face, and can change, it is advisable for business owners to make specific note of this compliance so as not to fall behind on just some of their external requirements, subjecting them to potential liability.
Other such requirements that may be required include: holding an organizational meeting to elect directors and officers, adopting bylaws, issuing shares of stock, adopting banking resolutions, holding shareholders’ and board of directors’ meetings on a regular basis, and taking minutes at board meetings and make them available to shareholders.
All of these requirements can be confusing and are time consuming. In addition, you cannot afford to get behind on them. You spent the time and money forming your business now you need someone who understands compliance formalities well enough to ensure your businesses protection and peace of mind.
The Litchney Law Firm is capable of offering the following services for you:
- Tracking and notification of required state filings
- Validation of your company’s current status with the State
- Generation of required compliance report forms
- Documentation forms for official meeting notices and minutes
- Alerts to notify you of meaningful events pertaining to your company based on the states in which your company is formed and if applicable, qualified to do business.
- We will alert you to critical dates and will also provide you with most of the forms that you need in order to stay in compliance, pre-populated with much of the data pertaining to your company which will save you time!
The Litchney Law Firm understand the complexities of keeping a corporation or LLC compliant, we can keep track of and notify you of critical compliance events, and provide access to important forms needed to properly document them. We will notify you when your state annual reports are due. All these alerts are conveniently emailed to you or anyone else you choose to be associated with your business.
Compliance requirements monitoring is available for clients who form their business entities with the Litchney Law Firm. Special pricing is offered to existing clients, but non existing clients may sign up as well.
If you are interested in purchasing this helpful service to keep your corporation or LLC intact, please contact us today and we will get you set up.
For further information or to discuss your business and corporate law issues, we invite you to schedule a free confidential consultation with an experienced northern and southern California business law attorneys by calling us at 916.983.2941, or filling out our contact us form on our website. The confidential consultation is free.