Congratulations! You have incorporated your new business. You’re all done. Just stick your fancy corporate binder on a shelf and forget about it.
Uh, not exactly…
We need to understand how to keep the business in good standing and protect your corporate veil. So, blow the dust off your old corporate binder and get to work.
What is a Corporate Veil?
A corporation is a discrete entity incurring its own debts, obligations, and liabilities. Operating as a corporation, it provides protection for its officers, managers, and owners.
This protection provides a wall or “veil” between the company’s assets and your personal assets. In lawyer speak; the Corporate Veil.
Piercing the Corporate Veil
Unfortunately, creditors and attorneys can still get past the protection of a corporate veil. This called “piercing the corporate veil.”
They do this by proving members of the company failed to treat the business as a sparate entity.
The two most common ways to pierce the corporate veil are:
- Personal acts of directors or officers that result in harm, injury or loss to the other.
- Failure to maintain the proper documentation or intermingling business with personal items.
If you lose your corporate veil because of item #1, it’s time to get an attorney. We can’t help you with that one.
The focus of this article will be item #2.
How to protect and maintain your Corporate Veil
The two most common errors are improper documentation and mixing personal with business affairs. It is simple to avoid these errors, but you must keep good records and stay on top of the simple tasks. Here is a quick list of tasks to help you maintain your corporate veil:
- Sign and file our Article of Incorporation with the State.
- Conduct an Organizational Meeting to empower the corporation to conduct businesses and provide limited liability. Shareholders elect the Director(s) and present the Articles of Incorporation for approval. The Director(s) should then hold an organizational meeting to establish the corporation’s structure and powers. Record all signed meeting minutes in your corporate book.
- Secure your EIN from the Federal government.
- Open a commercial checking account in the name of the company (see Nerdwallet’s list of FREE business checking accounts).
- Submit annual filings & fees with the state for licenses, permits or approvals.
- Brand our logo, company name and any trademarks on all official documents. Such as business cards, letterhead, invoices, company checks, brochures, etc.
- Per the corporation’s by-laws, hold Annual or Regular Meetings. Shareholders elect directors and directors elect officers. Note: not required for LLCs, but recommended.
- Hold Special Meetings as needed for corporate changes, tax or legal issues, or to discuss urgent items.
- For all corporate meetings, the invitees must receive or waive notice of the meetings.
- Maintain minutes of all company meetings and all corporate decisions.
- Keep the organizational documents of the company current (changes to ownership, stocks, resolutions, bylaws, article of incorporation, etc.)
- Ensure distribution of profits follow the corporation’s established rules.
- File corporate tax returns.
- Don’t commingle personal and company money. Keep separate accounts for the business and your personal expenses.
- Never pay for personal items with the corporate account.
- Use your logo on anything related to the business
- When officers or managers are signing contracts, always specify it is for the company. For example: “John Doe, as President of ACME Corporation”.
This is the 3rd article in our Asset Protection series. Before jumping in, ensure you understand the information provided in our earlier articles.
“What is the Best Business Entity to Protect Your Assets?” We discussed why it is critical for entrepreneurs to establish an entity. We also provided several practical examples for real estate, partnerships and “payroll” companies.
“What is the Best State to Incorporate In?”, we covered the myths and facts about incorporating your business within your state or looking to Nevada or Wyoming.
Owning and operating your own company provides liability protection and great tax benefits. To maintain these benefits, your business must look and act like a corporation.
Use this knowledge to prepare to work with your attorney and tax professional. Ensure your corporate veil remains solid into the future.
In our next stop on our Asset Protection Journey, we will be discussing insurance. In what circumstances is insurance needed? What types should be considered? And, how to asses and buy a policy.