Observing Corporate Formalities

Part 8 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

It is absolutely critical to keep in mind at all times that your limited liability company or corporation is not an alter ego or simply an extension of yourself. The entity’s bank account cannot be used as your personal bank account, you should not use the entity’s  money to cover personal debts, and, in general, your personal assets should not be relied on to continually cover your entity’s debts. This is true even if you are the sole member or shareholder. The entity is and must be treated as a separate “person” from yourself, with its own assets, activities, and representations.

Keeping that distance is often referred to as observing corporate formalities. Failing to do so can remove the very asset protections that your legal entity was designed to impart. Each business model is different and all necessary formalities cannot be listed for each company, but below are some general guidelines for observing the necessary formalities.

1. Your company should exercise care to hold itself out to the public as the company. All property, letterheads, billheads, contracts, advertising, business cards, and telephone listings should use the company’s full (or properly registered fictitious) name. Moreover, when you sign your name to a letter, check, or agreement on behalf of the company, you must clearly indicate your title or capacity to sign on that behalf. Typically this may be accomplished by writing the company name followed by your name and title, but each occasion for signature will be different.
2. Establish a separate bank account for the entity, in the entity’s name, and keep it separate from your personal funds. Do not commingle personal funds and corporate funds. Courts have held the commingling of funds as a basis to disregard the legal entity’s separate status and reach the member’s personal assets. If you transfer money in or out of the company, ensure it is properly authorized by its governing documents and well-documented.
3. Maintain appropriate assets and/or an appropriate type and amount of insurance for your entity. Another basis where courts disregard corporate entities (and reach member’s personal assets) is inadequate capitalization. There is no bright line rule for what constitutes “adequate” capitalization, but courts typically consider capitalization to be inadequate if the entity’s funding and resources are very small in comparison to the nature of the company’s business and risks commonly associated with that type of business. Especially for new businesses with little funding and resources, an appropriate type and amount of insurance can help address this issue.
4. Follow your entity’s rules. If the operating or shareholder agreement calls for reports or meetings or votes or certain signatures or notices or other things, abide by those requirements. Remember the entity is the one acting, not the member. This can be especially problematic for single-member limited liability companies, but if the rules are not observed that can lead to a finding that the member is completely dominating or controlling the entity – another basis where courts have looked beyond the entity to reach the member’s personal assets. One way to avoid this issue is to completely understand your entity’s formation and governing documents and seek counsel to guide that understanding, as opposed to printing and signing an overly complicated operating or shareholder agreement from the internet.

The above recommendations are just some of the better practices to ensure proper operation of your entity. There will be other best practices you will want to abide by depending on the specific nature of your business and type of assets held.

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn about best practices for observing corporate formalities, one of our experienced real estate attorneys would love to meet with you.

In the next post, we’ll discuss the need to insure both your company and its assets. If you would like to go back and re-read any of our earlier posts, you can find links below.

Introduction
Part 1: Do I Need a Legal Entity?
Part 2: What Type of Legal Entities are Available?
Part 3: Tax Treatment Considerations When Selecting Your Entity
Part 4: Your Entity’s Governing Documents
Part 5: Operational Considerations – Purchasing Real Estate – Title Insurance
Part 6: Operational Considerations – Purchasing Real Estate – Indenture Review
Part 7: Operational Considerations – Purchasing Real Estate – Loan Documentation
Part 8: Observing Corporate Formalities
Part 9: Insurance Considerations
Part 10: Drafting the Right Lease Agreement
Part 11: Litigation Considerations
Part 12: Should I Employ an Attorney to Assist my Real Estate Business?

Posted by Attorney Jeffrey R. Schmitt. Schmitt represents businesses and individuals in commercial litigation matters including banking and finance, real estate, condo and homeowners associations, professional liability defense, title disputes, transportation, and pension and retirement plans.