What Are Corporate Formalities and Why Do They Matter?

29
Mar 2022
What Are Corporate Formalities and Why Do They Matter?

            One of the main reasons anyone forms a corporate entity, be it a corporation, limited liability company, or partnership of some sort, is to insulate their personal assets from the liability of the business.  Corporate entities are a great avenue to separate your business from your personal (and there are a number of other reasons to form a corporate entity for your business as well), but if corporate formalities are not followed and your business is sued (or a creditor comes after your business for a debt owed), you run the risk of a court “piercing the corporate veil” and going after your personal assets.  So, what are corporate formalities?

            Corporate formalities can be a number of things, but it is easier to think of them as things that make your business separate and distinct from your personal matters.  For example, you should always operate entirely separate bank accounts (and credit cards) for your business, in your business’ name.  You should keep accurate financial records for the business (again, separate and apart from your personal records).  Your officers (if a corporation or LLC) or managers (LLC) should maintain their fiduciary duties to the business (that is, they should not be putting their personal best interests ahead of the interests of the business).  The business should follow its corporate bylaws (or, if an LLC, its operating agreement).  Importantly, the business should hold regular corporate meetings (usually annually) to conduct its business.  For a corporation, these annual meetings are both of shareholders (primarily to elect directors) and of directors (primarily to elect officers).  For an LLC, these annual meetings are of the members (primarily to elect managers or managing members).  Meeting minutes which reflect the business of the meeting should be prepared and signed by a corporate officer (or a consent to action in lieu of a meeting can sometimes suffice).  Even if the corporation has only one shareholder (or the LLC has only one member), it is important to follow these formalities.  Failure to do so can be extremely costly.

 

For More: Scott K. Burger

Updated: March 29, 2022