Undercapitalization – Don’t form a corporation with little or no capitalization (money in the bank) and then run up debts in
the corporate name without the intent or ability to repay the
debts. In other words, if your intention is to stiff creditors by
running up debts in the name of the corporation, you are
inviting a judge to pierce the corporate veil and hold you
personally liable. Courts look at this as a fraud upon creditors.
This is different from the situation where a person forms a
corporation and makes a good faith effort to run their business
with the intent to honor debts but ends up unable to pay for
the obligations incurred due to such reasons as a business
downturn, illness, lawsuits, etc.

Co-Mingling Your Personal and Corporate Funds – Don’t comingle
your personal and corporate funds. This is part of
maintaining a separate legal identity. You need to have
separate bank accounts for the corporation and you
personally. You need to avoid paying personal expenses
directly from the corporate account or paying corporate
expenses from your personal account. If you use credit cards,
the same principle applies. You need a separate one for the
business.

Improper Signing of Agreements – Don’t sign corporate
contracts or obligations in your personal name without
indicating you are signing for and on behalf of the corporation.
If you do this, it may appear you are personally guaranteeing
the contract or obligation and a court may find you personally
liable. There is no single way to do this but when signing
documents, you should always indicate you are signing as a
corporate officer or as an agent of the corporation for the
corporation. The following is a sample of how this might be
done:

(SAMPLE ONLY)
Graphic Printing, Inc.
By____________________________
John Smith, President

Another way could be: John Smith, President of XYZ
Corporation (or) John Smith, President, for and on behalf of
ZXY Corporation.

For example, if
you owned a plumbing supply business and some rental properties,
you may want to put the plumbing supply business into a
corporation and the rental properties into a limited liability company
or LLC. If someone sued your plumbing supply business, it would
not affect your rental properties and vice versa.

The disadvantage
of using separate legal entities for different businesses is that the
amount of bookkeeping and tax reporting requirements always
increases. From a practical standpoint, you have to weigh the benefit
of the protection of separate entities against the increased work and
cost to operate them.

The law also allows you to operate a business in one of several different forms or entities such as a corporation or limited liability company (LLC), etc. If the business is operated as a separate legal entity, then the business is considered separate and apart from its owners. Therefore, if the business is sued, only the business assets can be taken to satisfy or pay a judgment. Your personal assets are protected. This is called limited liability protection. This protection is valuable and a good reason to do business as an entity. However, the protection is not absolute or 100% guaranteed, but is conditioned on the proper organization and operation of the corporation.

When a lawyer sues a business entity, he or she will usually sue both the entity and the owners individually. This is because lawyers know the entity often does not have sufficient assets to satisfy or pay the claim. However, the law requires the person suing to prove that the entity, the corporation or LLC, was not properly organized and operated as a separate legal entity. The legal terminology is called “piercing the veil.” If the court allows “piercing the veil” then a judgment can be obtained against the entity and the individual owners. However, if the court determines that the party suing has not proven their case, then the limited liability protection applies. The person suing might still be entitled to a judgment against the entity but not against the individual owners and their personal assets.

The key is to organize and operate your entity, corporation or LLC, properly so that you have a strong argument, if you are ever sued, so that you are entitled to the limited liability protection. Organizing and operating the entity properly is not difficult, but there are certain steps or procedures that should be taken to help insure your protection.

Another way to discontinue is to file Articles of Dissolution with the secretary of state. Many states will have a form you can use on their website or you can contact them to obtain a form. When filing this form, you will need to indicate that all of the corporation’s creditors have been paid and there are no outstanding debts. Again, you will still need to notify the IRS and state taxing agencies that you are out of business or they will keep sending you forms and expecting to receive your tax returns.

Finally, you can file with the court requesting that the corporation be dissolved. This procedure is usually done only when the shareholders or other involved parties cannot agree on conducting business or on how to liquidate and distribute assets of the corporation. By doing this, you are asking a judge to review the facts and decide for you.

If you have a street address but most of the time no one is at home or at the address, then you may want to consider using a corporate registered agent so that you make certain you get important legal documents or notices.

You or any shareholder, officer, or director of your corporation (or other individual you know) can act as a registered agent for your company so long as you or they have a street address in the state. It is wise to make certain the address you list is one where someone will be present most of the time and where you can receive service or mail. This is important because you want to make certain you receive important legal documents or important notices from the secretary of state concerning you business so that you will be able to take appropriate action. If you fail to receive these documents, you could place your business in difficult circumstances such as a default in a legal action.

If a corporation is sued and the question of limited liability protection
for the shareholders is raised, then the failure to hold corporate
meetings may be one factor among others, which a court will look at
to determine if the corporation is being operated as a separate legal
entity under the law. My experience is that failure to hold corporate
meetings, in and of itself, will probably not be sufficient for the court
to disregard the corporate identity and hold the shareholders
personally liable. However, holding meetings and preparing minutes
will give the shareholders and directors a stronger argument that
they have been observing corporate formalities and have been
operating the corporation as a separate legal entity.

Minutes are also important in the event of disputes between
shareholders or officers and directors. They provide important
evidence of what the parties intended with respect to various
corporate actions.

A corporation can also satisfy this requirement by using a Consent in
Lieu of Meeting document instead of having an actual meeting.

My recommendation to the shareholders of a small corporation is
that they hold their annual shareholder and annual director meetings
each year and make certain minutes are prepared for each of the
meetings. If they have other business during the year, which
requires debate and a vote, they should hold a special meeting as
needed. Other business can also be conducted by using the Consent
in Lieu of Meeting form. Having minutes (or a
Consent in Lieu of Meeting form) for the annual meetings and one
or two other meetings during the year is evidence that you are
making a good faith effort to comply with the corporate formalities.

The downside of forming more entities to conduct business is that
each entity must keep its own set of records and file its own tax
returns. This, in turn, increases the amount of record keeping and
probably increases your accounting and tax filing costs.