Legal Reference & Blog

Checklist to Maintain Corporate Shield from Personal Liability

June 24th, 2008 Posted in Legal Reference

There is nothing more frustrating than to spend the time and money to incorporate, but then later expose yourself to personal liability for failing to adhere to the corporate formalities. The term “corporate formalities” gets thrown around often, but what exactly are they?

Well, I submit a list of do’s and don’ts to serve as a checklist to help you maintain the limited liability of your shareholders and to establish other good practices for doing business in the corporate form.

A. Hold Meetings.

1. Your annual shareholders’ meeting is set in your bylaws.

2. Your bylaws call for an annual board of directors’ meeting to be held immediately afterwards.

3. Additional special meetings of the board should be held when matters of importance come up such as:

a. Entering into a lease of new premises;

b. Entering into a substantial funding commitment;

c. Entering into a substantial leasing commitment;

d. Entering into any other significant contractual agreement;

e. Changing an officer’s salary;

f. Filling a vacancy in the board or officer complement;

g. Entering into a significant new venture;

h. Considering the sale, in whole or in part, of the assets or the dissolution of the business.

B. Develop A Planning Mechanism.

1. Review each year’s activities during the final month of the fiscal year.

2. Budget ahead for the longest period reasonably possible and review and analyze results at least semi-annually.

3. Review the results of 1 and 2 with your CPA to ensure tax planning is properly emphasized.

4. Begin to develop formal long-range planning capacities beyond budgeting if not already in place.

C. Sign all contracts in the name of the corporation in substantially the following form:

_ _[Name of corporation]_ _

By _ _[name of presiding officer]_ _

_ _[Title]_ _

D. Issue all orders in the name of the corporation.

E. Keep Corporate And Personal Interests Separate.

1. Do not commingle corporate and personal funds.

2. Maintain corporate funds in a corporate account or accounts separate and apart from any other account.

3. Do not use corporate accounts for personal loans or other personal purposes.

4. Do not negotiate loans, leases, etc., between the corporation and a principal other than on an arm’s-length basis.

5. Do not use corporate assets continually for personal use.

F. Carry reasonable insurance on the corporation, having due regard to the risks inherent in the corporation’s business. In addition, have a reasonable initial capital base in the corporation.

G. Set up a review mechanism for decisions made, so that all aspects of a proposed course of action will be considered.

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