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Attend to Your Corporate Housekeeping

Yes, they're cumbersome, but don't ignore the corporate formalities if you don't want creditors poking into your personal assets.
Written Dec 29, 2010, read 2581 times since then.
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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:

1. 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.

2. 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.

3. 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.

Learn more about the author, Nina Kaufman.

Comment on this article

  • CPA, MBA, Wealth Strategist 
Tacoma, Washington 
Merry McNutt
    Posted by Merry McNutt, Tacoma, Washington | Dec 30, 2010

    Great article, Nina. Not only is it well written and to the point, it is very important information and relevant to most soloprenuers these days. I'm a CPA and most of my small -business clients are either an LLC, S-Corporation, or C-Corporation (not too many owners willing to be a 'sole-proprietor anymore) and this is the bare bones information they each need to review. Thank you.

  • Business Lawyer 
New York, New York 
Nina Kaufman
    Posted by Nina Kaufman, New York, New York | Dec 30, 2010

    Thanks for your comments Merry! I'm glad you find the article relevant to solopreneurs. Feel free to share the article with anyone who may benefit from it.

  • Small Business Owner 
Roy, Washington 
Nicole  Rosen
    Posted by Nicole Rosen, Roy, Washington | Dec 31, 2010

    This is a great article. I am working to locate an attorney to form my corporation. I know how to form one, but this particular one is going to sell shares to raise money and I want to make sure my VEIL is re-inforced.

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