Corporate Veil or Corporate Fail?

MeisterBy creating a corporate entity (whether it is an S-Corporation, C-Corporation or a limited liability company), many smart business owners seek to create an additional layer of protection between their personal assets or that of their family and the potential liability that can arise when operating a business. Unfortunately, what many do not realize is that simply creating the entity isn’t necessarily enough to achieve or maintain that protection.

After the Articles of Incorporation or Articles of Organization, depending upon whether you decided to create a corporation or a limited liability company, have been filed and accepted by the North Carolina Secretary of State and after the By-Laws and Operating Agreement have been drafted, signed and tucked away, many additional steps remain, and the business owner who rests or relies solely upon that initial filing may one day be in for a very unpleasant surprise. So what needs to be done? At a minimum, business owners should:

(1) Maintain separate accounts for personal and business transactions. This means not only maintaining separate bank and credit accounts, but actually keeping the purchases made using either separate. Don’t use the company credit card to pay for personal lunches or vacations, and don’t use your personal checking account to cover the office rent if the company’s account is a little short one month.

(2) Run your business like a business. This does not mean that your business operations and decisions can’t be fun, have to be heartless or have to be all about the bottom line. They should, however, focus around the business and should not simply be an extension of you. Entities that fail to meet this standard are subject to having their corporate veil pierced in litigation, resulting in personal liability to the offending owner.

(3) Document what you’re doing through regular and well-kept minutes. While entities owned by more than one individual are supposed to have regular meetings, the entity owned by a sole individual won’t, even though that individual is called upon to make hundreds, if not thousands, of decisions throughout the business year. Keeping track of what those decisions were and why certain choices were made over others is important and can rarely be re-created at the end of the year. To that end, the smart business owner or owners will keep regular records as the year passes and will keep those records, also known as minutes, with their other corporate papers, files or books. When easily accessed, these records or minutes can often help deflect claims that an entity is merely the alter-ego of its owners or that a fiduciary duty has been breached by one owner to another.

(4) Keep up with your filings! With only a few exceptions (for instance, non-profits), entities are required to file an Annual Report with the North Carolina Secretary of State and to pay the accompanying fee with their submission. Failure to do so will, eventually, result in an administrative dissolution, thus leaving the individual owner exposed to personal liability for debts and other wrongs that might occur while the dissolution remains unrectified. Moreover, an entity that repeatedly is tardy in their filings or is repeatedly dissolved and then reinstated is demonstrating their failure to maintain proper corporate formalities, thus creating further opportunity for their corporate veil to be pierced.
Failure to observe these and other guidelines won’t necessarily result in the immediate end of your business or automatic liability. But it opens the door for potential trouble, and business owners that have been remiss in following these guidelines are strongly encouraged to contact corporate counsel to help get their affairs in order!



Corporate Law