It is very likely that when you made the decision to organize your company as a corporation, as opposed to another type of business entity structure, one of the main selling points was the limited liability protection for corporate debts and liabilities that is afforded the corporation’s shareholders. You’ve probably heard this liability protection referred to as the “corporate veil”.
The underlying reasoning for the veil of protection is because the corporation is deemed a separate and distinct entity from its shareholders. Thus, it follows that if deemed a separate and distinct entity, in a court of law, the debts and liabilities of the corporation are just that, corporate debts, and the corporation’s shareholders, in being separate and distinct individuals and entities themselves, are not liable for the corporation's debts and liabilities.
This is an appealing concept for a business owner who wants to protect his or her personal assets, and it is clear why so many small business owners opt to organize as a corporation. But, unfortunately, as many a small business owner has found out after it is too late because they were not properly informed from the beginning, the corporate veil does not simply appear to form a force-field of never-ending liability protection just because you file some corporate formation documents with the Secretary of State’s office. There are state laws, statutes, rules and regulations that govern how a corporation must be maintained in order to keep its separate entity status, and in turn its corporate veil of protection for its shareholders. Yes, the truth is that if you are not careful and diligent your corporation’s corporate veil can be pierced, and the liability protection you are depending on can turn out to be really no protection at all.
Fortunately, while state laws differ as to what is required to maintain a corporation in any particular state, assuring your corporate veil remains a shield of protection is not difficult, and is really only a matter of knowing what steps must be taken and then, of course, taking them.
The following is a step-by-step guide to setting up your corporation and maintaining it. If you follow these steps and familiarize yourself with your state’s corporate maintenance laws your veil of protection is unlikely to be pierced and the liability protection you think you have will truly be there if and when it is needed.
Step 1 - Prepare Articles of Incorporation, and have them signed and acknowledged by the incorporator(s). File the Articles of Incorporation with your Secretary of State’s Office and request extra certified copies. If you intend to do it yourself, your state’s Secretary of State’s website will have instructional information, and likely templates and forms, that will guide you through the process.
Step 2 - Order a corporate kit (which will include a Minute book, Seal and Share Certificates, among other things). Your corporation will be required to maintain a corporate minute book and these kits are specifically designed to make corporate minute keeping and other maintenance duties simple and organized.
Step 3 - Prepare corporate Bylaws. (Bylaws are the rules of your corporation. They set forth the procedures of corporate operation and governance.)
Step 5 - Issue the shares of stock purchased by the shareholders. Share Certificates, including all required legends, should be prepared, executed and delivered. Be sure to keep a record of consideration received for the shares; issue receipts and keep signed duplicates. If required by your state, file a Notice of Issuance of Securities (or similar document) with the Secretary of State.
Step 6 - If your corporation will operate as an “S” Corporation, make sure to prepare, execute and forward Sub-Chapter S election, Form 2553 (http://www.irs.gov/pub/irs-pdf/f2553.pdf) to the IRS.
Step 7 - A Form SS-4 (Application for Employer I.D. Number) (http://www.irs.gov/pub/irs-pdf/fss4.pdf) needs to be prepared, executed and forwarded to the IRS, or applied for online (https://sa1.www4.irs.gov/modiein/individual/index.jsp).
Step 8 - If required by your state, a Statement of Information must be completed, executed and filed in a timely manner with the Secretary of State. (For example, in California, http://www.sos.ca.gov/business/corp/pdf/so/corp_so200c.pdf must be filed within 90 days of incorporation.)
Step 9 - Open a separate corporate bank account. I significant sign that you and your corporation are truly separate and distinct entities is assuring there is no commingling of personal and corporate funds. Having a separate corporate bank account is, therefore, a must. Remember to bring: certificate of Incorporation, Employer I.D. Number and copy of organizational minutes or other resolution authorizing person to act and open bank account.
Step 10 - Adequately fund your business and corporate accounts. Undercapitalization is a sure way to get your veil pierced.
Step 11 - As stated above, maintaining a minute book is a requirement of all corporations. Maintaining minutes of corporate meetings is essential. Remember, major actions taken by the corporation will require a special meeting of the Directors and special minutes must be executed. Moreover, in certain instances, as dictated by the Bylaws, major actions taken by the corporation will require a special meeting of the Shareholders as well, and special minutes must be executed.
Step 12 - Conduct an Annual Meeting of the Shareholders, once per year, every year, on the date set forth in the Bylaws, to, among other things, elect directors.
Step 13 - Conduct an Annual Meeting of the Board of Directors, once per year, every year (this can be on the same date as the annual meeting of the Shareholders), to, among other things, elect officers.
Step 14 - If your corporation will do business under a name other than the corporate name, be sure to file a Fictitious Business Name Statement with your county clerk or other appropriate government entity.
Step 15 - Apply for and obtain required permits or licenses in the corporation’s name from regulatory authorities having jurisdiction over the corporation.