I’ve Formed My Company, So Now What?

Banking and Financial Institutions

By Banking and Financial Institutions

The Basics of “Corporate Formalities” & a Few General Rules for the Small Business Owner

Almost all small business owners understand that before they open shop they need to first form a company. Most small business owners even understand that operating their business through a corporate entity helps to insulate their personal assets from liability. But, in my experience, too few small business owners fully understand how to use their corporation or limited liability company to best ensure the company is treated as a separate entity from you, the owner.

In a nutshell, if you and your company fail to follow certain “corporate formalities”, your company could lose its corporate status, create adverse tax consequences, and even open the door for individual liability. Let’s say your company gets sued, a smart plaintiff will attempt to “pierce the corporate veil” and go directly after you, and your hard earned assets. Think of your company as a protective bubble with you in the middle – when used properly, the protective bubble (veil) is designed to keep creditors away from you personally. Unfortunately, far too many small business owners, for some reason or another, fail to follow the legally required corporate formalities, and consequently leave an opening for plaintiffs/creditors to pierce that protective bubble, thereby allowing them to go after you in your individual capacity.

Below are 10 Rules that all small business owners should followafter forming your company. These rules have been developed over more than 100 years of corporate jurisprudence, but are, in most instances, equally applicable to limited liability companies (“LLCs”).

  1. Abide by the Company’s Operating Agreement, By-Laws, etc.If you didn’t go to a lawyer to create you LLC and decided to save a few dollars by forming your company on-line, beware. Missouri law requires all LLCs to have an operating agreement. If you do have an operating agreement (LLC) or By-Laws (corporation), review them annually and make certain your company complies with their terms.
  2. Sign All Documents on Behalf of Your Company. You can quickly personally obligate yourself on a contract, purchase order, etc. if you sign said document in your individual capacity rather than as a member of your LLC or officer of your corporation. Your signature block should look like this:
              –[Name of company]–
              –[Title of individual]–
  3. Hold Scheduled Meetings. If you are a corporation, you need to hold your annual meeting as dictated in the bylaws.
  4. Hold Special Meetings. Again, if you are a corporation and an important decision is coming up, you should hold a special meeting consistent with your by-laws (think… signing a lease, selling the company, buying a company, borrowing money, entering into a big contract, compensation, etc.).
  5. Use Your Company Minute Book & Resolutions. Use your minute book to record actions of shareholders and directors of a corporation. This would include annual minutes showing the election of directors by the shareholders, as well as resolutions showing any significant corporate activities where a special meeting was held.
  6. Bank Accounts and Commingled Funds. You should never commingle personal funds with the funds of the company; rather, you need to open a separate bank account for the company. This is not your money, this is the company’s money.
  7. Stock Ledger Book. If you are a corporation, rather than an LLC, you are required to keep a stock ledger book evidencing who has stock certificates and what was paid for them. This is also an effective way to keep track of who owns how much of the corporation.
  8. Document Loans to and From the Company. Any loan you make to or from the company must be properly documented – usually through use of a promissory note. The company is not your ATM.
  9. Maintain Accurate and Up-to-Date Accounting Records. Pretty obvious, but if your company is audited you’ll regret having skipped this step.
  10. The Last Place to Borrower is from the IRS.Be certain to set aside sufficient funds for taxes – this includes employment, income, and sales taxes. Unlike most debts, these taxes are as a general rule non-dischargeable in bankruptcy.

In sum, remember, you are not your company, and your company is not you. Even if you are the only owner of your company, and you are the only person running the company, it is crucial you always keep in mind that your corporation or LLC is a distinct and separate entity from you personally, and must be treated as such.

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