California Corporations - The Importance of Maintaining Corporate Formalities

June 15, 2009
Maintaining corporate formalities is critical for California businesses that have elected to incorporate. Often small business owners wrestle with the decision to incorporate and after considerable deliberation opt for incorporation largely because they seek to limit personal liability. When a corporation is properly maintained, stock holders are generally not liable for the debts and other liabilities of the corporation.

Corporate formalities 6.jpgUnfortunately, too often new small business owners burdened with the day to day operations of bringing a new business on line fail to heed their attorney's advice regarding corporate formalities and let them slip by the wayside. Others resort to self-help incorporation tools to reduce costs and simply fail to appreciate the importance of maintaining corporate formalities. More importantly, these young entrepreneurs move forward believing they have formed legitimate corporations and are therefore protected from personal liability. By commingling assets, using corporate assets for personal use, failing to adequately capitalize the corporation to meet current and anticipated debts, failing to hold annual meetings and keep written records (minutes), and/or failing to properly document corporate actions, the new corporation starts to look more like the alter ego of the new business owner and less like a corporation.  

This is not to say that young corporations must do everything perfectly.  Courts are unlikely to sanction piercing the corporate veil for minor technicalities.  When making the "piercing the corporate veil" decision, courts look to the totality of circumstances including whether there was fraud or other circumstances that would make insulation from liability unfair to a creditor.  The problem for the young corporation and its stock holders is that creditors are quick to take advantage of whatever technical violations they learn of.  The attempt to pierce the corporate veil itself creates a significant hardship for the targeted shareholder/owner of the corporation.  To avoid any risk, the best precaution young corporations can take is to diligently comply with all corporate formalities.