A corporation is a type of business formation that allows the company to operate as its own separate entity, independent from the owners of the business. This means that business owners are shielded from much liability and losses that the corporation may be exposed to. However, in order for the protections of a corporation to exist, the business must observe certain guidelines and operating rules.
“Corporate formalities” are steps and precautions that the business must take to ensure that the corporation remains legally distinct from its owners. Most of these steps include keeping separate records for corporate activity, holding regular meetings for corporate directors, and maintaining a financial independent account for the corporation.
The individual requirements for corporate formalities can vary widely by state, and according to the specific type of corporation that the business has filed as. The following is a corporate formalities checklist to follow that can help make sure that corporate formalities are being followed. Some important steps to follow may include:
- Hold Scheduled Meetings: The corporation should hold an annual shareholder’s meeting. The date, time, and details for the meeting should be clearly stated in company bylaws. An annual board of directors meetings is usually held immediately after the shareholder’s meeting
- Hold Special Meetings: Special meetings need to be scheduled whenever important corporate decisions must be made, such as opening a bank account, changing officer salaries, or entering into a new business venture. Notice of the special meeting should be given to the participants
- Keep Accurate Records: The company should keep good financial records and records of corporate activities. Records should also include meetings of minutes, as well as corporate tax activity. Keeping clear, accurate and separate records will also help abuses of corporate assets.
- Exercise Fiduciary Duties to the Corporation: Officers and directors need to exercise loyalty to the corporation by exercising their fiduciary duties. This means not using corporate assets or opportunities for personal gain, and keeping corporate matters private and confidential
- Develop a Planning Routine: A well-developed business plan can help avoid errors and liability in the future. The business plan should cover matters like: both long-term and short term goals; reviews of each year’s performance; tax planning; yearly and quarterly company budgets
- Address Company Contract Procedures: Procedures for negotiating and signing business contracts should be enforced. These may include: authorizing an officer to sign contracts; making all company purchases in the corporation’s name; and maintaining a separate corporate account
- Follow company Bylaws, Articles of Incorporation, and other documents: Failing to comply with company documents can expose directors and shareholders to liabilities that they should not have to incur.
If corporate formalities are not followed, it can result in what is known as “piercing the corporate veil”. “Piercing the corporate veil” means that the corporation is no longer acting separately from the business owners. This can result in the business owners becoming liable for losses or liabilities that the organization incurs.
To avoid liability for directors, officers, and shareholders, business actors should take the following precautions:
- Do NOT engage in insider deals, insider trading, or other abuses of confidential corporate information
- Do NOT use corporate funds and assets for personal reasons
- Do NOT mix corporate funds with personal funds (i.e., “commingling”)
While this corporate formalities checklist can be of help to those starting or maintaining a corporation, many disputes and violations can arise during the course of business dealing. If you have issues with corporate formalities, you may wish to contact a business lawyer for advice. Your lawyer can assist you in complying with both government laws and internal company policies. Observing corporate finalities may take some extra measures, but can save the corporation from extra legal expenses in the future.