Basic Business Structure Cautions
In order to set up a business or corporation, there are some key business cautions that you need to be aware of:
- Consult an attorney, create an issue stock certificate for shares invested, and have a minutes book.
- You created this corporation to limit your personal liabilities, therefore, be sure to use the correct, full corporate name on your letterhead, ads, contracts, and similar documents.
- Make sure everyone who deals with your company knows that you – or the other officers – are acting in your capacity as agents of the corporation, not personally. That means using appropriate titles: president, secretary, treasurer, when signing everything from checks and contracts to ordinary correspondence.
- Don’t co-mingle money. Keep your personal finances separate from the corporation’s. If you use corporate money, establish a paper trail that shows that you received a salary, an advance, or took out a loan. This same rule exists if you lend money to your company.
- Maintain the important corporate records, including your bylaws, resolutions and minutes of meetings; document that all major actions were taken by the corporation, not by you personally.
- Hold annual meetings required by law and special meetings when major actions are decided. If the corporation becomes subject to an I.R.S. audit, or if the corporation is sued in a civil action, the minutes book and similar records may be subpoenaed. This may create an attempt to pierce the corporate veil.
So what is the corporate veil?
When a corporation is created and when the corporate status is properly respected and maintained, a “corporate veil” exists that separates the corporation from its owners. This veil is the legal distinction between the corporation and its owners and it protects the personal assets of the owners from liability for corporate obligations. As long as the corporate veil continues to exist, the owners (shareholders) of the corporation can avoid personal liability for any obligations of the corporation. In the latter circumstance, there is an exception. There may be a time when a financial obligation requires that the shareholders sign personally to insure payment of the obligation.
For example, John Doe buys a piece of equipment and wants to finance it with his bank. The bank grants the loan with a proviso that John signs personally to guarantee the loan.
John does not sign for the loan personally; instead he signs John Doe, President XYZ Corporation. Then in the note or in a separate document, he signs as an individual guaranteeing the loan.
What is the difference? The obligation is still a corporate obligation and provided that it is paid as agreed, the principle and interest come from the company as a proper business expense. All other aspects of the transaction including the liability for damages arising out of the use of the equipment are the company’s responsibility.
Rules to Follow Regarding the Corporate Veil:
- Do not use corporate funds to pay the personal obligations of any of the stockholders, directors, officers or any other person under any circumstances.
- Do not allow stockholders, directors, officers or any other person to use corporate assets for their personal use.
- File corporate tax returns and annual reports on a timely basis as they come due.
- Do not include any personal assets in any corporate financial statements, reports, inventories, or accountings (and vice versa).
- Do not do anything in the corporate name that the corporation cannot do in its own name as described in the corporate purpose (found in the articles of incorporation), in the bylaws, or in the legitimate decisions or resolutions from any meeting of the shareholders or directors.
- Operate the corporation as a business separate and distinct from the personal affairs of the stockholders or anyone else.
If the corporate veil is pierced for a corporation owned entirely by one person, the corporation can be designated as a sole proprietorship. If this happens, the owner may have unlimited personal liability for business obligations.
If the corporate veil is pierced for a corporation owned by two or more persons, the corporation may be designated as a partnership. If this happens, the owners may have unlimited personal liability for business obligations.
For more information on these vital topics check out "How To Run A More Profitable Business".