Corporations are formed for many reasons, but perhaps the most common reason advanced by small business owners is to obtain the shield of limited liability for corporate obligations. With certain exceptions, liability for the obligations of a corporation is limited to one’s investment (capital contributions and equity) in the corporation. In most cases, personal assets are protected against claims of corporate creditors. Shareholders are said to be protected by the “corporate veil.”
The corporate veil is not impenetrable, however. Under certain circumstances courts will look beyond the corporation to its shareholders to satisfy corporate obligations. One of the most common examples where this happens is where corporate formalities are not observed consistently. If you operate your corporation as an integral part of your personal affairs and fail to maintain sufficient separateness, you may be jeopardizing the protection of corporate limited liability.
Here are some of the factors which can jeopardize your corporate protections:
- Failing to keep separate records reflecting the corporation’s business and activities.
- Failing to maintain minutes of corporate actions on a reasonably current basis, preferably annually.
- Co-mingling corporate and personal finances, such as borrowing funds from the corporation without customary loan documents and security or using corporate property for personal purposes.
- Paying personal bills and expenses with corporate funds or corporate checks.
- Failing to use a corporate designator (Inc., Co., Corp., Ltd., and so forth) in written communications with the public.
- Failing to sign corporate documents indicating your corporate office and representative (officer) capacity.
The lesson here is simple and clear: Keep your corporate minutes up to date. Keep a separate set of books and records for the corporation. Any transactions between a shareholder and the corporation should be documented in writing and should meet customary commercial standards. Sign contracts on behalf of the corporation using the full corporate name, your corporate title (President, Vice President, Secretary, Treasurer) and always make certain that a corporate designator is used to show the world that it is your corporation which is doing business and not you individually. Never sign your name without indicating your title.
Following these simple steps will insure that your corporate limited liability will be preserved to the maximum extent possible. If your corporate minutes require updating or if documents between you and your corporation are required (leases, promissory notes, etc.), please feel free to call us and we can provide prompt assistance in this regard.
– Kevin Palmer