CORPORATE FORMALITIES ARE NOT PAPERWORK: THEY ARE LIABILITY PROTECTION

If you own or operate a North Carolina corporation, making sure to observe “corporate formalities” isn’t just administrative housekeeping; it is an essential step in preserving limited liability and protecting shareholders from potential personal liability.

Under the North Carolina Business Corporation Act, corporations are treated as a separate legal entity from their owners. However, courts will disregard that separation (known as “piercing the corporate veil”) when owners fail to respect and observe the corporate structure and corporate formalities.

​As an initial matter, corporations must maintain the proper governing documents, including Articles of Incorporation, Bylaws, and any amendments to those documents. Most people forming corporations are aware of the requirement to file the Articles of Incorporation with the North Carolina Secretary of State to form the business. However, we see more and more corporations that are operating without bylaws, which is the internal governance document required for a corporation under North Carolina law.

It is also important for corporations, even small single owner corporations, to hold and document the meetings of shareholders and directors that are required by North Carolina law and the corporate bylaws (in the absence of a shareholders agreement that states otherwise).

There are other formalities that must be observed under North Carolina law, such as: maintaining separate corporate and personal accounts to ensure that monies are not commingled; properly issuing and tracking shares in accordance with the Articles of Incorporation and Bylaws; and, filing the necessary reports with the North Carolina Secretary of State and maintaining a North Carolina registered agent.

Under the worst circumstances, failure to observe these formalities may result in the corporate form being ignored and personal liability being imposed against the corporate owners. Jesson & Rains offers annual business maintenance plans whereby we ensure these fundamental documents are in place, provide meeting minutes templates, file the annual reports with the Secretary of State, serve as the registered agent, and more. Click here for more information. Now is the time to sign up, as many annual reports are due April 15!