Q:

What are corporate formalities?

A:

You may think that incorporating or forming an LLC automatically protects you from the liabilities of your home business. Not true.

For the law to recognize your business as a separate entity, it must behave like a business. You must follow what are referred to as “corporate formalities.”

At a minimum, this means that the company must make decisions properly, document those decisions, and protect the company’s assets.

Your business decisions must be made officially by the company itself. Even if you have a closely-held corporation, you should hold board meetings to make decisions. Your secretary should record the minutes of those meetings, and then the corporation (or LLC) can act accordingly.

Another key formality is that the corporation needs separate bank accounts and adequate financial statements. If you make the mistake of mixing personal and business assets, your business could be in serious legal trouble.

Failing to follow corporate formalities can result in your corporate shield being pierced. You could lose the limited liability that you incorporated to obtain. Run your business like a corporation, and it will be treated like one. Otherwise, the law might set aside your corporate form and allow creditors to come after you personally.

This is a bi-weekly feature at Home Office Warrior. Now is your chance to send questions to an experienced attorney. Submit your questions to Andrew at andrew@homeofficewarrior.com or leave your comments here.

Disclaimer: Andrew Flusche is a licensed Virginia attorney, but these posts do not constitute legal advice, nor do they create an attorney client relationship. For legal advice, consult an attorney licensed in your jurisdiction.