While poor management is cited most frequently as the reason businesses fail, failure to complete and file accurate documentation is not far behind. Adhering to corporate formalities is not all that difficult or particularly time-consuming, and it is certainly worth the extra time and effort when it comes to ensuring that your asset and liability protection strategies are properly carried out. It can also save you lots of time and money that would otherwise result from costly fines and loss of contracts.
In managing the day-to-day operations of the Corporation, the Board of Directors and Officers of the company must be mindful to follow corporate formalities which help to maintain the Corporation’s distinction as a separate and independent legal entity. To ensure this, the Officers must perform a number of specific tasks within a timely manner. Failure to accomplish such formalities may enable a creditor to strip you of asset protection and otherwise disregard the corporate veil and seek personal liability against the shareholders of the Corporation. This is known as “piercing the veil”- a legal maneuver in which the creditor tries to establish that the Corporation failed to operate as a separate and distinct entity thus causing the individuals involved to become personally liable for the debts and other such obligations of the Corporation.
Corporate formalities are procedures using documentation to legitimize and track the Corporation’s business affairs. The requirements can be complex or quite simple depending on the makeup of your company. Here are a few basic guidelines:
- Annual Report Filings. Besides your initial Articles of Incorporation, you will be required to file an Annual Report with the Secretary of State. The Annual Report is part of the personal property return that must be filed by most entities. It indicates the type of entity, name, mailing address, whether the mailing address is a new address, the Entity ID number, the Federal Report is not the same as an annual report to shareholders that contains financial Employer ID Number, the original date and state of incorporation, federal principal business code, whether business is conducted in the state, and the nature of the business. In the case of Corporations it lists officers and directors and whether the Corporation can issue stock. The Annual information required by the federal Securities and Exchange Commission.
- Corporate Notice. It is important that you let the world know that you are operating as a Corporation as opposed to conducting business as an individual. In some states, you will be required to publish the establishment of your company in a court-approved publication for a designated period in order to ensure proper notice. You want everyone to know that you are doing business as a Corporation, and your business cards, brochures, contracts and the like must substantiate this. Do not use “ABC” when your company’s legal name is “ABC, Ltd.” To do so you would need to file a DBA permit.
- Annual Meetings. While most states only require an annual meeting of the Members and Directors of a Corporation, it is a good practice to hold such meetings regularly if only to avoid miscommunication and misunderstanding, as well as to provide evidence of business formality. The meetings are also subject to notification requirements, which should be addressed in the company’s Bylaws.
- Meeting Minutes. As noted, it is a good practice to hold annual meetings, and it is further advised that you prepare minutes for those meetings. Meeting minutes reflect the company’s decisions and help to validate its separateness. They also provide documentation as to the company’s plans and major decisions.
- Bylaws. Bylaws govern the workings of the Corporation. It helps ensure that the courts will respect your limited liability by lending credibility to your Corporation’s separate existence. There are a host of issues to cover in your Corporation’s Bylaws, some of which depends on your business’ particular situation and the needs of its owners. There are many sources for blank and sample Bylaws, but you must ensure that your Bylaws is drafted to suit the needs of your business and is in compliance with the laws of your state. ICS can draft a custom set of Bylaws for your company.
- Resident Agent Files. The resident agent’s job is to accept service of process in the case of legal action such as a lawsuit or summons on behalf of the Corporation. It is your duty to make sure that you have a proper resident agent in place. Your resident agent is required to have three (3) documents on file for your company: a current list of Shareholders, the Corporation’s Bylaws and a current list of the names and addresses of the Directors and Officers of the Corporation.
- Corporate Record Book. Your Corporate Record Book should house all of the critical documentation of the Corporation as required by state law. These documents include your Articles of Incorporation, a current list of Members and Directors, the Corporation’s Bylaws, an updated Stock Transfer Ledger, Meeting Minutes, Financial Statements and federal, state and local tax returns for the past three (3) years, and any duly-adopted resolutions of the Corporation.
- Separate Bank Account. The Corporation should have its own bank account which handles money specifically designated to the company. The Corporation is a separate entity with its own tax identification number (EIN), and its bank account helps to further legitimize the presence of the company in its preferred state. For more specific information, request our article entitled, How to Open a Business Bank Account.
- Separate Tax Returns. Because the Corporation is a separate entity from its owners, it is necessary to file a separate entity tax return. Corporate income is reported separately from its owners and an informational return must be filed even if the Corporation did not conduct any business or generate any income in order to remain in compliance.
- Separateness. A common but fatal mistake often made by new companies is when its owners fail to maintain the distinction between company and personal assets. To prevent the veil of your Corporation from being pierced, you need to develop a mind-set of separateness (“keeping at arms’ length”). You are NOT the company. In order to validate separating yourself from the Corporation, you need to make sure that you carry out the business of the Corporation legitimately and make sure that you never commingle funds. Just as you are separate from the Corporation, your money is separate from the Corporation as well. Your mutually beneficial relationship with the company cannot last if separateness is not respected.
Corporate compliance is crucial to maintaining your corporation. Although dealing with corporate formalities may seem tedious and boring, the consequences of neglecting these important tasks are tremendous. Failure to follow the above formalities can have dire consequences for both the Corporation and its Members. While it may not be legally required to carry out all of these formalities, careful adherence to them is advisable for the efficient, ethical and stress-free operation of the entity.
Visit our website and learn more about a Corporate Compliance and Management Service, which is designed to provide you with a better understanding of your company’s relationship with its compliance formalities.
ICS can help you with corporate compliance.