Before discussing corporate formalities, it may be helpful to have a basic understanding of exactly what a corporation is first—at least in a legal context. In general, a corporation is a form of business structure that allows the corporation itself to operate as its own entity, separately and independently from the owners of the corporation.
This means that a corporate structure can be used as a shield to protect business owners against any financial losses and/or legal risks incurred by a corporation. In order for a corporation to serve as a shield, however, the business owners must abide by certain laws, corporate policies, and standard operating guidelines.
If the owners fail to comply with such “corporate formalities,” then they may be held personally liable for any losses or risks incurred by the corporation. In other words, “corporate formalities” refer to the necessary procedures and protections that business owners must follow. This must be done to ensure that their corporation remains a legally separate entity that is considered to be distinct from the business owners themselves.
Some basic steps that the owners of a corporation can take to make sure that only the corporation will be held accountable for any losses or risks include:
- Maintaining certain types of business records to denote corporate activity;
- Keeping an independent financial account for the corporation that is separate from any of its owners’ personal financial accounts; and
- Scheduling, holding, and attending regular meetings for all personnel who are considered corporate directors.
To learn more about setting up a corporation and following corporate formalities in your state, you should contact a local business law attorney as soon as possible. A qualified business law attorney will be able to provide valuable legal advice on how to structure your business as a corporation. In addition, your attorney may even be able to create a checklist of corporate formalities that are specifically tailored to your particular business.
What Do Corporate Formalities Usually Include?
In general, corporate formalities often vary in accordance with the laws of different states, the bylaws of each individual business, and the type of business structure that is established. While all of these factors will affect the kinds of corporate formalities that a business must comply with, there are a number of corporate formalities that tend to apply across the board.
Some common business activities that might appear in a list of corporate formalities may include the following:
- Business records: As previously mentioned, a corporation must maintain separate and accurate records of all corporate activities. These records may include files, such as notes from shareholding meetings, corporate tax filings, and corporate documents like an entity’s Articles of Incorporation.
- Corporate policies: Shareholders and directors of a corporation must abide by any corporate policies, company bylaws, the Articles of Incorporation, and various other legal documents in order to ensure that they are personally protected against any losses or legal liabilities incurred by the corporation itself.
- Business plans: A corporation that develops and formalizes a well-thought-out business plan may be able to prevent corporate mistakes and legal risks from occurring in the future. A corporation’s business plan should contain provisions on both quarterly and yearly budgets, tax information, short term and long-term business goals, and procedures for how to conduct an annual review of the business.
- Contract procedures: A corporation should make sure to enforce its process for negotiating, drafting, and executing business-related contracts. For instance, a corporation should outline the steps that the corporate directors must take to create and complete a contract.
- These guidelines may include information on which corporate officers are authorized to sign contracts, indicate the individuals who are permitted to make purchases on behalf of the corporation, and the details for the business’s corporate or financial account.
- Scheduled meetings: Generally speaking, most corporations are required to hold at least one shareholder meeting per year. The date, time, and any other important details for the annual shareholder meeting must be clearly stated within the corporate bylaws. A corporation will also need to schedule and hold an annual meeting for the board of directors. The board of directors meeting usually takes place immediately after the annual meeting of the shareholders every year.
- Fiduciary duties: Anyone who is appointed to become a corporate officer or director will legally be required to demonstrate their loyalty to a corporation by executing their fiduciary duties. For example, a corporate officer or director is not allowed to spend corporate assets to acquire personal items. It is also considered a violation of a corporate officer or director’s fiduciary duties to use corporate opportunities for personal gain.
- Additionally, corporate officers and directors have a duty to keep certain information about the corporation confidential and private from all other parties.
- Special meetings: Special meetings must be scheduled and held when certain activities come up in connection with running a corporation. For instance, members may need to hold a special meeting to make crucial decisions about the corporation like whether to open a second corporate account, whether to enter into a new business opportunity, or whether to increase the salary of corporate officers.
- It should also be noted that all participants who are expected to be in attendance must be provided separate notice of the special meeting. This notice must be sent to the appropriate recipients each time a special meeting is scheduled.
Are There Any Actions That Corporate Directors Should Avoid?
When the directors of a corporation fail to comply with corporate formalities, they may be held liable for any losses and/or liabilities that the corporation incurs due to their misconduct. This concept is a legal doctrine that is formally known as, “piercing the corporate veil.”
The phrase “piercing the corporate veil” generally refers to a scenario in which a court finds that the corporate directors committed some act for which they should be held personally responsible, as opposed to using their corporation as a shield against liability. This often occurs in situations that involve corporate fraud.
Some common examples of activities that have led to corporate directors being accused of piercing the corporate veil of a business include the following:
- Using money or assets that belong to a corporation to pay for personal expenses;
- Mixing (i.e., commingling) funds from corporate accounts with the money held in a personal account;
- Partaking in insider trading, insider deals, or any other kind of act that abuses confidential and privileged information held by a corporation;
- Defrauding creditors or committing some other type of wrongdoing that affects third parties; and/or
- Failing to adhere to the necessary corporate formalities without justification.
Accordingly, corporate directors would be wise to refrain from engaging in any of the activities mentioned in the above list if they want to avoid or protect themselves against corporate losses and liabilities.
Do I Need a Lawyer for Issues with Corporate Formalities?
There are a number of issues that can arise when attempting to comply with various corporate formalities. These issues may become even more complicated when you factor in the different requirements of state-specific laws and the articles of incorporation or bylaws set for a particular business.
As such, you may want to consider speaking to a local corporate lawyer for further legal advice on any issues or disputes that you encounter concerning corporate formalities. An experienced business lawyer will be able to give you important legal guidance on the relevant laws and procedural requirements in your state, as well as can discuss the best way to comply with corporate bylaws.
Your lawyer will also be able to explain the possible legal consequences that you or your corporation may face if you fail to abide by any corporate formalities or applicable laws. In addition, if you need assistance with drafting the Articles of Incorporation or similar business documents, your lawyer will be able to help you with this process as well.
Lastly, if you or your corporation is being sued for noncompliance with corporate formalities, your lawyer will also be able to provide legal representation in the proper court.