Corporations New and Old: Keeping The Shield Up

Corporations formed for small and medium sized business operation have many great advantages. The primary advantage is that the shareholders (the true owners) get to protect all of their personal assets from adverse financial situations that may occur during the course of the business operations. This is known as the “corporate shield”.

This would include an uninsured or underinsured “incident”, other legal contests and business failure. Only the investment of the shareholder and the assets of the corporation would be subjected to such an unfortunate business situation. The personal assets of the shareholders would remain safe, unless….

Whether it is a new corporation or one that has been operating for many years, it is vital that diligent efforts are made to Keep the Shield Up! If you don’t, the shareholder’s assets become exposed to liability. The key is to 1) adhere to corporate formalities and 2) avoid what is known as allowing a “unity of interest” to occur.

Corporate formalities are not a big deal, but they have to be done. I have repaired countless entities formed with only the filing of the Articles — no Bylaws, no Minutes, no issuance of stock. The status of such an entity is essentially “non-existent”, and it would take any lawyer about three seconds to attack and win a judgment against the shareholders.

Corporate Minutes are not hard to do, but they need to be done. At the very least, the corporation needs to have written annual minutes summarizing the significant transactions during to the past year, re-electing officers, and approving financial reports for the company.

The unity of interest issue occurs when the shareholders fail to treat the entity as a separate, legal and distinct entity. The most common failure is when shareholder and corporate “loans” go back and forth between the two without any promissory notes or corporate minutes. If a third party looks at the actions of the shareholder and corporation and sees just one…the shield is gone. Be smart; it’s your livelihood.