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Corporate Formalities: Are They Necessary?

Many of our clients have us form corporations to shield them from personal liability for their business endeavors. However, courts sometimes find reasons to “pierce the corporate veil" and impose personal liability on company owners and shareholders if the company fails to maintain corporate formalities such as conducting annual shareholder and director meetings and failing to keep corporate records. Under these circumstances, a court may find that the corporation is only a façade and impose corporate liabilities personally against its shareholders.

Consequently, to maintain corporate protection for its owners and shareholders against personal liability, it is critical to observe proper corporate formalities including having annual shareholders meetings to elect company directors, appoint company officers, passing shareholder resolutions, maintaining a corporate minute book and maintaining critical meeting minutes for the corporation.

The personal liability shield is only one of the many reasons for maintaining corporate formalities. Tax treatment is another important reason.In the course of an audit, the IRS auditors can seek to examine corporate minute books to determine whether a company is acting as a corporation for tax purposes. The IRS would be looking for proper documentation of corporate activities, the appointment of officers, authorization of corporate borrowing,payment of bonuses and dividends and other general corporate activity to be found in the corporate minute book.

In addition, should you wish to sell your business, the potential purchaser will conduct its due diligence investigation and will seek to examine the records of the corporation particularly looking for appropriate authority for various corporate activities. Also, banking resolutions, borrowing resolutions, entering or withdrawing from long term contracts will be need to be documented in the corporate minute book.

Typically with a small, closely held business, the last things on your mind may be the holding of annual shareholders and directors meetings and ensuring that proper corporate resolutions are prepared and kept with the corporate books. We offer our clients assistance in conducting the required annual meetings as well as preparing critical corporate resolutions to ensure that the corporate shield from personal liability is maintained. In many instances, we can assist you in complying with the requirement for annual meetings by way of consent of the shareholders without the need for an actual meeting and also draft corporate resolutions for your company.

 

To assist you in complying with the corporate formalities for your business including annual meetings and general corporate governance, contact Jim Millane, jhmillane@lanak-hanna.com (714) 620-2550 ext. 338.