By Attorney Kelly Jesson
One of the main reasons why business owners formalize their businesses by forming an LLC or a corporation is so that their personal assets and liabilities can be separated from their business assets and liabilities. If the business is sued, the owner’s personal assets will be protected, and vice versa.
However, in certain circumstances, a court may disregard the corporate entity and hold its owners personally liable for business debts if the corporate entity, at the time, had no separate mind, will, or existence of its own. In making this determination, a court will consider, among other factors, whether a business has complied with “corporate formalities.” Corporate formalities include issuing and following bylaws, issuing shares, electing a board of directors, holding annual meetings of the board and shareholders, sending proper notice of these meetings, and keeping minutes and other corporate records. Owners should not intermingle business and personal assets or employees. Owners should not deal with third parties in such a way that the third party does not know they are doing business with an LLC or a corporation.
Some closely-held corporations may enter into a shareholder agreement in lieu of some of the above requirements. With an LLC, some of these corporate formalities do not have to be observed, since LLCs are subject to fewer formal statutory requirements than are corporations.
If the owner of a business complies with corporate formalities and consistently lists the business’s name on contracts and other documents, third parties will be considered to have voluntarily dealt with the business, and a court will be less inclined to hold the individual owner personally liable for the business’s debts. However, if corporate formalities are being ignored, even inadvertently, that could lead to a court ignoring the existence of the LLC or corporation, which may result in the business owner’s personal assets being at risk.
If you or someone you know needs assistance bringing a business in line with its required formalities, please give Jesson & Rains a call! We offer flat fee packages for these formation documents. We also offer flat fee annual plans that include preparing annual meeting notices and minutes, filing annual reports with the Secretary of State’s office, and other legal services. More information can be found here. We work with our clients to reduce the likelihood that they will ever be responsible for business liabilities.
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