Observance of Corporate Formalities
If you have gone through the process and expense to incorporate your business, then ownership of the business is no longer in your hands but in the hands of the corporation. While you may own all the shares of the corporate stock, it is this juridical person called a corporation that owns all of the corporation's assets. Further, it is this corporation that now has the sole right to make management and other business decisions.
If you have incorporated and transferred ownership of all business assets and liabilities to the corporation, it was for good reason, and probably that reason was to shield your personal assets from any obligation to pay business liabilities or debts. This shield is sometimes referred to in court decisions as a "corporate veil."
What you do after you have taken the required steps to incorporate your business is just as important as the initial steps. In order to successfully hold a shield between your personal assets and your business liabilities you must be vigilant. If you are not careful to behave as the law requires a corporation to act, a business creditor may be successful piercing the corporate veil and obtaining a judgment permitting him to seize your personal assets.
There are a number of ways a business creditor can convince a court the business is still a sole proprietorship and that he should be allowed to pierce the corporate veil. One popular, and often successful, way is for a creditor to show the court that an owner has routinely ignored many of the steps the law requires. A corporation must conduct itself in specific ways in order to make ownership, business or other management decisions.
No matter how large or small a corporation is, the corporate laws view the management levels of a corporation as:
shareholder action and responsibility;
board of director action and responsibility; and
officer action and responsibility.
In actuality, there is often a fourth level, the level of employee (e.g., a General Manager hired by the directors) actions and responsibilities.
While shareholders may discuss any number of different items at their Annual Meeting, the business corporation law requires that shareholders, at a minimum, elect the persons who will serve on the board of directors over the next twelve months. In essence, a board of directors exists only if its members have been elected by the shareholders. Although there may be more during a year, the law thus mandates that there be one shareholder meeting per year, and minutes of these meetings should always be prepared.
The next management level down is board action. Since shareholders will customarily meet only once a year, the responsibility to manage the corporate entity shifts to the persons on the board of directors once board members have been elected by the shareholders. The newly elected board of directors should meet immediately following the Annual Meeting to address the board's first responsibility — the election of officers. The law requires every corporate entity to have at least a president, secretary and treasurer. But, these officers acquire their rights only by action taken by the board of directors. Because a corporate board often can conveniently meet only four or so times a year, the law anticipates that much of the rights and duties as to management of a corporation on a week-to-week basis shifts to the officers.
In the reverse, employees of a corporation are responsible to the officers. Officers, who customarily work day-to-day in the business, then answer to the board of directors. The persons on the board of directors in turn answer to the shareholders at the Annual Meeting.
Even though the participants of a corporation may fill the shoes of all four levels — the shareholders, directors, officers and employees — that group should not neglect the formalities required by the corporate laws, i.e., a shareholder meeting once a year and a meeting of the board of directors no less than three or four times a year. Additionally, written minutes of those board as well as shareholder meetings and minutes should be preserved indefinitely. A failure to meet and follow the requirements set by the Business Corporation Act may enable a business creditor to pierce the corporate veil and seize your personal assets!
Republished | Originally published on December 1, 2004
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Disclaimer: This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.