While many of our clients have formed corporations, some are not aware of the basic requirements which must be met in order to properly maintain the corporation. This article is intended to point out some of these requirements and is intended for a general audience, applies to corporations organized in California, and does not constitute legal advice. As with all legal matters, you should check with an attorney concerning your particular situation. Employer Identification Number Every corporation filing a state or federal tax or informational return must have an employer identification number (an "EIN") An EIN is your company's "social security number" and it is used by banks and other companies as an identification number. The EIN is usually applied for by the attorney who incorporate the business, the company's accountant or its payroll company. Bank Accounts The corporation must have its own bank account into which all income must be deposited and expenses paid. The checks should be printed with the full corporate name and any trade name it is using. To open this account you usually only need a copy of the Articles of Incorporation and your EIN. Since the passing of the Patriot Act, there are additional regulations which may require the bank to request additional information or documents. If your bank needs something else, such as a Secretary's Certificate or similar document, your attorney can draft this for you. Piercing The Corporate Veil and Alter Ego Liability The corporate structure will generally protect the assets of the shareholders from the liabilities and debts of the corporation. However, this is so, only where the corporation is treated like a separate entity (distinct from its owners) and observes the corporate formalities required by law. If you fail to do so, a creditor may be able to ignore the corporation and pursue the individual shareholders' assets in order to satisfy the debts and obligations of the corporation. We call this "piercing the corporate veil." When the corporate veil is pierced or disregarded, then the shareholders are saddled with the liability for its debts and obligations. This type of liability is routinely called "alter ego liability." In other words, the law will impose liability against the shareholders because there is no separateness between them and the corporation. Obviously, this would be a bad result for the shareholders. In order to avoid these negative consequences, the corporation should keep in mind the following points. 1. Corporate Records It is important that you maintain your corporate records in a professional manner, and in way which complies with the California Corporation's Code. Failure to do so is one of the key factors courts will look to when considering whether or not to pierce the corporate veil. Specifically, the corporation is required to hold annual meetings of the shareholders and annual meetings of the Board of Directors. These can be actual meetings with the required quorum, or they can be held "on paper." What this means is that a document called a "Unanimous Written Consent in Lieu of Meeting" is drafted and executed by all persons who are required to be at that meeting. Additionally, any extraordinary transactions must similarly be documented, and would be done so at a "Special Meeting" of the shareholders or directors (depending upon the specific facts of each transaction). Once these meetings are held the minutes or written consents should be placed into the appropriate place in your corporate book, and maintained there for the life of the corporation. 2. Adequate Capitalization The shareholders must invest in the company an adequate amount of capital for the nature of the company's business. They cannot simply lend the company the money. In the case where the company is not adequately capitalized, a court may permit a creditor to look through the company and hold the owners liable for the company's obligation. Courts have held that inadequately capitalized companies can be considered to be shams. 3. Maintaining Corporate Identity In addition to the issues discussed above, there are a number of steps which you should take to preserve the corporation's identity separate from its owners. These include: not using the corporation's assets as if they were the assets of the shareholders; executing documents as an officer of the corporation (eg, "President" or Secretary"); placing the corporation's income into the corporation's account; not commingling the personal assets of the shareholders with the corporation's assets; and using the full name of the company, including the designation "Inc." The Annual Obligations Clients often ask what needs to be done annually to maintain their corporation. In addition to the annual meeting of shareholders and annual meeting of directors discussed above, a corporation is required to file tax returns with both the State and Federal governments. Also, the Secretary of State will send to you a "Statement of Information" form which needs to be completed and mailed in. The first such statement is usually filed by the incorporating attorney as part of the incorporation process. Please bear in mind that the foregoing is not an exhaustive list of everything you need to know about a corporation's duties. It is intended to answer the questions my clients have most often posed to me. However, by following these guidelines, you will be well on your way to ensuring that the corporation both complies with the law and will withstand an attack by creditors seeking to pierce the corporate veil. |
