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.
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.