Corporate formalities are essential to abide by even in the event that you’re running your business on an ethical platform. Even company owners and corporate officers who follow ethical guidelines could still wind up in court and end up bankrupt if they fail to observe corporate formalities. There is a great deal of liability protection afforded by incorporating a business.
Using Corporate Formalities for Additional Protection
Corporate formalities are about more than just determining what’s in your best interest and document it on paper. It’s important to create these formalities but also to refer back to them on a regular basis. If you’re ignoring the formalities, you may expose yourself to unnecessary risks.
Many individuals who choose to incorporate limit their personal liability when conducting business. However, if a corporation has not managed formally, courts are not able to tell whether or not the business is its own entity, separate from the owner’s business assets or the owner himself or herself.
When Protection Doesn’t Hold Up
A corporation won’t be protected by limited liability if it is unclear whether there is not there is a distinction between the two. In cases against corporations in which formalities are not observed strictly, any individual bringing forth a lawsuit may be capable of doing wat is known as piercing the corporate veil which can break down the protection for a corporation’s owner and his or her personal liability. The key to preventing this is observing all corporate formalities, including:
- Maintaining books
- Keeping minutes
- Having regular board and shareholder meetings
- Adopting a charter and bylaws
- Issuing stock
These are the most essential formalities for any business to observe on a regular basis. Having clearly documented guidelines and materials about this can help make it easier in the event that someone chooses to bring forward a lawsuit and intends to pierce the corporate veil and tap into an owner’s personal liability. These formalities may seem like too much pomp and circumstance but they are actually a crucial component of getting the liability protection that you sought when incorporating your business. Following these formalities on a regular basis makes it easy to turn to documentation and evidence that supports that the business owner’s personal assets and the corporation are two distinct things.
Do you have further questions about how to establish and make the most of corporate formalities? Talk to an experienced business attorney to have yours reviewed.