The Importance of Observing Corporate Formalities

Business law is puzzling to many, particularly with regard to corporations, because the laws and regulations governing corporations are tedious and complex. If you are an officer, director or majority shareholder of a corporate entity, a Des Plaines and Hoffman Estates attorney can provide guidance about how to protect yourself from a personal lawsuit; in particular, one way to protect yourself is to make sure your corporation observes corporate formalities

Personal Liability for Corporate Matters

One of the benefits of running a business as a corporation is that the corporate entity is its own separate self; the people behind the corporation have protection from personal liability for the corporation’s debts and obligations. In certain circumstances, however, a creditor or litigant can attempt to hold the corporation’s shareholders, officers and directors responsible as individuals. While courts are generally reluctant to do so, if the litigating party can pierce the corporate veil, individual liability may accrue and you could find yourself personally involved in a corporate lawsuit.

In Illinois, a creditor or obligee can pierce the corporate veil and hold officers, directors and shareholders liable for the corporation’s obligations if it can show that the corporation is merely an alter ego or a shell of the person. Illinois courts will pierce the veil if the corporation and the individuals composing the corporation no longer appear to be separate – if there is such a strong unity of ownership and interest that the idea of a corporation separate from the individual is a fiction.

If your corporation is small, finding a unity of ownership and interest might not be difficult, particularly if you fail to observe corporate formalities and fail to conduct the business as if it is a separate business.

Observing Corporate Formalities

To protect yourself from personal liability for your corporation’s debts and obligations, treat the business as a business and not as a sole proprietorship or a “mom and pop” business:

Keep your personal finances and property separate from the corporation’s finances and property. Segregating personal and corporate assets is key – do not use corporate offices, equipment, money, accounts, inventory, contact lists or software for personal purposes. Do not pay your utilities from corporate bank accounts or use your personal laptop to conduct business.

Conduct meetings. Hold a directors and shareholders meeting at least once per year. When you want to make a corporate directive or discuss corporate matters, use formal meetings separate and distinct from regular shareholder and board meetings. At every meeting, whether periodic or distinct, always make sure the corporate secretary keeps minutes of the meeting for the corporation’s records.

Maintain and routinely update corporate records. File periodic financial reports and update your certificate of incorporation on a periodic basis. Maintain the corporate record book with details about corporate actions, human resources, capital structure and general operations.

Observing corporate formalities is not just a matter of keeping your business looking professional; it can protect you and any other officers, directors or shareholders from personal liability for the corporation’s debts and obligations. If a creditor is able to pierce the corporate veil and a court adjudicates personal liability, the officers, directors and shareholders could lose personal assets. If you have a corporation or are considering starting a corporation, whether the corporation is large or small, contact a Des Plaines and Hoffman Estates lawyer to discuss how to properly maintain the corporate form and protect yourself from personal liability.