Many businesses are organized as Corporations in order to protect the owners’ financial situations. An owner of a Corporation is not personally liable if the Corporation gets into debt or is sued. An owner’s losses are limited to the amount invested, unlike with other business types such as a Partnership or a Sole Proprietorship where the business owner’s personal assets could be lost if the company is sued or goes bankrupt with money owed to creditors.
Owners are protected from personal responsibility for corporate losses because the Corporation is a separate legal entity. However, to maintain the corporation’s identity as distinct from its owners, it is essential to respect corporate formalities. An experienced Scottsdale Arizona business law attorney can help you to understand what is involved in respecting corporate formalities so you do not take any chances on losing the protections that incorporating provides. Call Lotzar Law Firm, P.C. today to speak with an experienced attorney who can help you.
How to Respect Corporate Formalities
Corporate Formalities simply refers to steps that you need to take to help ensure that your organization actually operates as a separate legal entity. The need to respect Corporate Formalities is most important when you are a sole owner of a corporation or when an organization is closely held by a few shareholders. When a large publicly-held corporation exists, it is generally clear that the company is independent from its owners. However, if you have a smaller business, it is easy to become lax in maintaining Corporate Formalities and to stop treating the business as the separate enterprise that it should be. This can have serious consequences and it is important that you don’t let yourself fall into this pattern. The more you can do to respect Corporate Formalities and maintain the Corporation as separate from yourself, the more protection you will have if a legal issue should arise.
Some of the different things that you need to do in order to ensure that you respect Corporate Formalities may include:
- Holding meetings at least annually and keeping minutes. You should hold an annual shareholders meeting in order to elect the members of the Board of Directors for the Corporation. Your company Bylaws should specify the date, time and other details for the Annual Meeting. In addition, you should also hold Special Meetings when decisions need to be made or issues arise.
- Keeping financial records and records of corporate activity.
- Acting as a Fiduciary to the Corporation. This means you should always act in the best interests of the business and not use any corporate opportunities or assets for your personal benefit.
- Establishing and following Articles of Incorporation and Company Bylaws. These documents should set out the rules for how your business will run and should be followed carefully.
You should ensure that you do not co-mingle funds or use your corporate accounts as a personal account, as this can result in questions about whether you are actually maintaining Corporate Formalities and treating the company as a separate business.
Lotzar Law Firm, P.C. can help you with these and other steps to respect Corporate Formalities. Call today to schedule a consultation with our Scottsdale Arizona business lawyers to learn more.
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