Over the past several months in my articles, I have been stressing to business operators and owners the fact that in order to protect their assets from potential creditors or claims, it would be prudent to incorporate or form a limited liability company. As I have been informing you, a corporation will not only provide certain protection of assets, but if done correctly, can also provide for a reduction in taxes being paid.
Since writing these articles, I have been contacted by several individuals who have a corporation that was set up by either an accountant or through a company providing “incorporation services.” These individuals have asked me to review their corporate documents and how they are operating their actual businesses. Unfortunately, I have found that many of these corporations are deficient in their documentation and provide a means for a creditor to possibly go directly after the shareholders by “piercing the corporate veil.”
Just filing Articles of Incorporation with the Secretary of State will not provide the protection that business operators seek. A corporation is intended to be a distinct “person,” and as such, must really exist in more than just a name. After formation, the formalities of transference of assets, establishing bank accounts and issuance of stock must be completed before the corporation really exists.
It is important that the corporation continue as a separate entity; examples include: (i) separate bank accounts, (ii) no commingling of funds, (iii) that the shareholders who are also employees, are paid an appropriate salary, (iv) that taxes are paid, and (iv) that certain transactions are approved by the Board of Directors. Another mistake that is made is the failure to keep up the formalities of the corporation and that the yearly minutes of both the shareholders and board of directors are prepared.
A founder of a corporation must make sure that they do not refer to themself as the “owner” or to the other shareholders as their “partners.” If founder(s) are officers and they own stock, do refer to themselves as the “owner” or to other shareholders as a “partner,” it could create an alter-ego situation and personal liability could be created. These are just some of the basic rules you need in order to be properly advised by an attorney to make sure you are protected.
I urge people who have incorporated, to assure themselves that they are properly conducting business, taking the steps to protect themselves from personal liability and from paying unnecessary taxes. If you used someone other than an attorney to create your corporation, you should have the documents reviewed by an attorney and you will know if your books and records are in proper order.