There are many variables that go into choosing the appropriate legal entity for your business. One of those variables is how much personal liability will be taken on by the founders/owners. Some entity forms limit the liability of an owner to the amount invested in the business. If a business owes somebody a debt, that person can only go after the business’s assets, he or she cannot go after the personal assets (e.g., house, cars, bank accounts, etc.) of the business’s owner.
Using either the corporation or LLC forms provides this type of limited liability for the owners of the business. There are some requirements, however, that must be met so that this type of personal liability protection will be recognized by the law. Simply filling out the appropriate state required paperwork and paying your fee is not enough. Among other things, ‘corporate formalities’ are required.
In order to cut off the personal liability of a business’s owners, the business must act like an independent legal entity by following acknowledged corporate formalities on a continual basis. How does a business act like an independent legal entity and what are these formalities?
Generally speaking, a business must properly address the following issues:
1. Maintain Corporate Records
2. Produce Annual Reports
3. Fulfill Your Meeting Requirements
Corporate Records
While records requirements vary from state to state, generally a business will need to maintain past corporate records at its principal place of business. Relevant records include the current Articles of Incorporate (Corporations) or Articles of Organization (LLC’s), the Corporate Bylaws or Operating Agreement, minutes of shareholder, directors, or members meetings, written communication between owners and the business, the ownership interest ledger, the names and addresses of current owners, directors, and officers, and the most recent annual report and financial audits.
Annual Reports
Most states require that corporations or LLC’s file a statement and pay a fee annually.
Meeting Requirements
An organizational meeting is required after the initial incorporation paperwork is filed. All owners, directors, and officers should attend this meeting. This meeting addresses initial corporate matters such as electing directors, adopting articles, bylaws or operating agreements, electing officers, and issuing stock certificates.
While each of these steps are straight-forward, the complications that can arise by failing to take these steps can be disastrous. A business owner’s personal assets are at stake.
If you have questions about your business and personal liability, feel free to contact me or any other qualified business attorney.
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