The answer is, it depends. If a business fails to follow corporate formalities, a court may impose liability on the company’s owners, officers and principals. Similarly, if a company is indistinguishable from its owners, or it is solely formed for fraudulent purposes, courts will allow creditors to attack owners or individuals controlling the business.
The main reason to do business under an entity is to protect business owners and principals from business liabilities and risks. The general principle is that once a company is incorporated, it would be a separate legal person or entity. Through this separate entity, officers or principals of the company can escape liability because of the shield the entity provides. This protection, however, does not come free. Neither is it unconditional.
As a business owner you may end up in a situation in which a court puts aside limited liability and holds you personally liable for the company’s action or debts. This is called “piercing the corporate veil”. To avoid such an unpleasant outcome, make sure that you strictly follow the corporate formalities.
There are certain corporate formalities that should be maintained to protect your company’s status as its own legal entity and protect you from potential personal liability. Examples for corporate formalities are as follows:
- maintaining adequate capital in the company to meet all current and foreseeable debts,
- not offering to personally pay company debts,
- separating company funds from personal use,
- obtaining appropriate authorizations for major business steps,
- properly documenting loans between a company and its owners,
- not using company assets for personal use,
- holding regular meetings of shareholders and board of directors,
- keeping written documentation of the proceedings of these meetings,
- obtain necessary authorizations from the State that you are doing business in,
- not misleading public about your company including company’s full legal name.
The above list is non-exhaustive. There are other corporate formalities. A licensed U.S. corporate lawyer can help you understand these formalities and protect you and your business.
