Forming A Corporation? What Do “Corporate Formalities” Mean and How Difficult Are They To Implement?

by Scott Legal, P.C.
Contact

When deciding on which business entity to select, a corporation is almost always one of the options considered.  The primary reason is a Corporation solves the problem of potentially losing your personal assets by separating the individual and the business and this structure limits the business owner’s risk to the amount of money invested in the business.  In order to make sure that you are in fact protected though, the corporation must adhere to “corporate formalities” and if these formalities are not followed the corporation will not be recognized and a business owner and/or shareholders may open themselves up to personal liability.  When a corporation is not recognized because formalities have not been followed, this is known as “piercing the corporate veil” and this is something you want to avoid.

What are “Corporate formalities” and how Difficult are they to Implement? 

Adherence to corporate formalities is often cited as a significant disadvantage for those who consider a Corporation as a business form and this is often why many instead opt for a Limited Liability Company (LLC).  While forming an LLC is certainly an option, corporate formalities are not as bad as most think.  Here is a list of corporate formalities you must follow along with some general comments.

  1. Create Bylaws. Every corporation must have bylaws and bylaws are really a set of internal rules governing how the corporation is run.  While this at first may seem like a daunting task, there are many templates that can be used as a starting point. Also, if you hire a lawyer to set up your corporation, he/she will typically draft these for you and this will usually be included in the set up fee.
  2. Hold Shareholders Meetings. Shareholders of the corporation should meet at least annually to elect directors.  When you initially form a corporation, you should immediately hold a meeting and elect the board.  Minutes should also be recorded at this meeting.   You should note that shareholders, board members and officers can all be the same people and each can have multiple roles.  What that means is that a corporation formed by one person will hold a meeting by himself and document the appointment of himself to the various roles.
  3. Hold Board of Director Meetings. The board of directors of the corporation  has to meet regularly.  Also, a designated person from the corporation (eg. person designated secretary) should record minutes of the meetings, reflecting resolutions and discussions that the directors had at that meeting.  When forming a corporation, the initial bylaws should also be adopted at the first board meeting.  All major decisions of the corporation should be adopted in a board resolution pursuant to the procedure set forth in the bylaws (such as mergers, stock issuances, major financial decisions such as loans, dividends, guarantees, hiring of consultants and legal experts, transactions with insiders, senior officer compensation, etc.).
  4. Maintain A Stock Ledger & Issue Stock Certificates. A stock ledger should be maintained which reflects the stock ownership of the corporation and the names and addresses of the shareholders.  You should also issue stock certificates to those who own shares that represent their ownership in the corporation.  If you do not have a ledger or certificates, you can pick one up at a stationary store.
  5. Set up a Corporate Bank Account. The Corporation has to have a separate bank account that is in the name of the Corporation.

Here are some additional things that you should consider when setting up a corporation to establish strong corporate governance and to ensure that you do not run into any piercing the corporate veil problems.

  1. All business of the corporation with third parties should be conducted in the name of the corporation so that it is clear that the directors and officers are acting on behalf of the corporation and not in their individual capacity.
  2. The corporation should file all appropriate federal, state and local tax returns and pay taxes when due, as well as obtain all necessary permits and licenses.  In addition, the corporation should apply for a federal tax ID number and this can easily be obtained by applying online by visiting the IRS Web site.
  3. Retain a qualified accountant.  A qualified accountant can assist you with your tax return and can set up your books and records for you.
  4. You should make sure the corporation is adequately capitalized by maintaining adequate capital in the corporation to meet all current and foreseeable debts. If you do not, your corporation could be viewed as a “sham” corporation which would permit the corporate veil to be pierced.
  5. You should ensure that you maintain adequate liability insurance necessary for your type of business.
  6. You should consult with a lawyer before you personally guarantee any debts of the corporation and do not offer to personally pay corporate debts.
  7. Do not commingle corporate and personal funds by placing any corporate funds in personal accounts.
  8. Make sure you do not use corporate assets for personal use unless the board of directors of the corporation explicitly authorizes such use.

The above is not an exhaustive list of all corporate formalities but the majority are covered.  While maintaining corporate formalities for a small company is not difficult, issues do arise and it is very important to establish a strong corporate governance structure as your company expands.  As such, you should seek the counsel of an experienced attorney familiar with corporations and corporate formalities.

If you are considering setting up a corporation, contact Scott Legal Services, P.C. for a consultation. You can call us at 212-223-2964 or email us at iscott@legalservicesincorporated.com.

Click here for PDF Version

Also, click here to obtain a free chart that summarizes a number of things to consider when selecting a business entity in an easy to read and understandable format.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Scott Legal, P.C. | Attorney Advertising

Written by:

Scott Legal, P.C.
Contact
more
less

Scott Legal, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.