What are the essential steps to preserve limited liability protection?

A judge will usually consider various factors together (not
just one) in deciding if shareholders have operated the corporation
properly. The following, although not all-inclusive, is a summary of
corporate actions or formalities that are important keys to
maintaining limited liability protection.

The corporate organization needs to be completed and
observed. In a nutshell, this means filing articles of incorporation, holding an organizational meeting or preparing a consent in lieu that
provides for adoption of bylaws, appointment of directors
and officers and authorizing the issuance of shares of stock.

Issue shares to the shareholders. Issuance of shares of stock is often done at the organizational meeting although it can be done at other
times as well. If no shares are issued, a question arises as to
who owns the corporation and who is entitled to vote. A
corporation cannot be properly organized without
shareholders.

Hold shareholder and director meetings. There is no legal requirement that meetings be
held in a certain manner. They can be formal or informal.
Corporate law does provide that shareholders and
directors should hold meetings to conduct corporate
business which is outside the ordinary day-to-day operation
of the business. In lieu or instead of holding meetings, the
law allows each of the participants to agree in writing to the
corporate action being taken by signing a Consent in Lieu of
Corporate Meeting.

Corporate law does not dictate how
many meetings should be held or how often meetings
should be held. That is up to the directors of the
corporation and is based upon the business needs of the
company. Having minutes of meetings or consents in lieu of
meetings in your corporate records is a good indication that
you have been operating like a corporation. However, the
absence of minutes or consents is an indication you have not
been operating like a corporation.

Treat corporate property as separate from the individual
shareholders. Property owned by the corporation should
not be used for the personal benefit of individual
shareholders unless there is a valid business reason for
doing so. Authorization for a shareholder to use corporate
property should be set out in minutes or as a written
consent from the board of directors. A shareholder may
need to reimburse the corporation for the use of certain
property.

Do not co-mingle corporate and personal funds. Since a
corporation is a separate legal entity, a new corporate
checking account should be established as soon as the
corporation is formed. Corporate funds and the
shareholder’s personal funds should not be commingled.

The corporation should also maintain a set of corporate
books or financial records that are separate and apart from
the shareholder’s individual finances. The shareholders
should not pay personal expenses with corporate funds
and/or checks. However, a shareholder can receive
payment in the form of a salary, bonus, commission, etc.,
and can be reimbursed for business expenses so long as the
proper accounting is made.

Sign corporate documents properly. The proper signing of
corporate documents is important so that a question is not
created as to whether the individual or corporation is legally
bound. The important thing is that it is obvious that the
person signing is doing so for or on behalf of the
corporation and not for themselves individually.

Make certain that your customers and creditors are
aware that you are operating as a corporation. You
should notify, to the extent reasonably possible, all of
your customers and creditors that you are now
operating your business in the corporate form. This can
be done by putting the corporate name on your
letterheads, envelopes, business forms, business cards,
and business checks. You should make certain that
advertisements, signs, brochures, etc., contain the proper
corporate designation at the end such as Inc., Co., or
Corp. If you have followed these steps, you should be entitled to the
limited liability protection. If you have not, the judge may pierce the
veil and find the shareholders individually liable for the corporation’s
debts.