By Stephen P. Katz, Guest Contributor
With tax season over and your tax returns timely filed, it is a good time to consider some corporate housekeeping issues that are important to help keep intact the limitation of liability that corporate entities provide to their shareholders. While not necessarily the first thing on the agenda of the hectic schedule of many business people, the failure to do simple corporate housekeeping and to make sure certain corporate formalities are being followed can have a serious negative impact on the ability of a corporations to shield its shareholders from liabilities of the corporation. Creditors can use the failure to follow corporate formalities as a grounds to “pierce the corporate veil” and look to the assets of the shareholders of the corporation to satisfy the debts of the corporation.
To avoid this negative result and to better maintain the limited liability of shareholders of corporations, here are some corporate housekeeping tips that can be helpful to avoid having your corporate veil pierced:
Director and Shareholder Meetings
The Corporation should have annual director and shareholder meetings and keep minutes of those meetings in the minute book of the corporation. Furthermore, outside of the ordinary course business decisions should be approved by the Board (and in certain cases the shareholders) and records of meetings or written consents approving those decisions should also be kept with the minutes of the corporation.
Organize Company Records
The minute books of the corporation should be updated to contain minutes of all director and shareholder meetings.
Review the Bylaws
The directors should review the bylaws of the Corporation to ensure that the corporation is operating in compliance with the bylaws. Furthermore, a review of the bylaws will be helpful to determine if changes to the bylaws are necessary because of new facts and circumstances.
Elect New Officers and Directors and Remove Inactive Officers and Directors
Directors and officers who do nothing and are not involved in the corporation should be removed, and people who will be involved in the affairs of the corporation should be elected as officers and directors. Resolutions to that effect should be prepared and filed in the corporate minute book.
The corporation should be capitalized in a sufficient manner to keep it running. Courts will consider the fact that a corporation is undercapitalized in making a determination to pierce the corporate veil.
Make Sure Agreements are Arm’s Length and Documented
If the corporation has any agreements, especially with affiliates, those agreements should be at arms length and should be reduced to a writing. For example, if a shareholder is providing services or assets to the corporation, the services or assets should be provided for arm’s length consideration and pursuant to a written agreement. The absence of such documentation may point toward a commingling of assets and/or an alter ego status of the corporation, which are both factors courts use in making a determination to pierce he corporate veil.
Review Banking and Accounting Records
It is very important that funds not be commingled with funds of shareholders or affiliated entities. A review of banking and accounting records should be performed to ensure there is no commingling of funds. Furthermore, where funds are transferred between affiliates and shareholders, a legitimate business reason for such transfer should be documented.
The corporate housekeeping tips listed above are not intended to be an exhaustive list of actions you should take to avoid piercing the corporate veil, as courts will consider many other factors in making a determination to pierce a corporate veil (including, for example, the presence or absence of fraud, insolvency at the time a debt is incurred, lack of corporate assets, payment of excessive dividends, functioning as a facade or an alter ego of the shareholders and improper use of corporate assets), but it should make you aware of some basic things that you can do to help maintain the protection from liability that corporate entities provide to their shareholders.