Protection Afforded By A Corporation

Aside from liability resulting from ones personal acts or from personal signature, the owner of a corporation may have liability if the corporation has not been properly maintained. This liability is called “piercing the corporate veil.” The theory is that if the owner treats the corporation as a mere extension of the owner, as the owner’s “alter ego,” the courts will not treat the corporation as a separate person. In other words, the owner must at all times treat the corporation as a separate legal person. If the owner operates the corporation as if it were a mere extension of himself, the corporate veil may be pierced.

The sole shareholder of a corporation can still easily
maintain this legal separation by following a few simple procedures.  
First, never pay personal bills directly from the corporate funds or the corporate bank account. A corporate check should always be written to the owner for the owner’s compensation and then personal bills should be paid from the owner’s own account. The payment of personal bills from corporate bank accounts is the first thing that a creditor looks for when trying to pierce the corporate veil.

It is okay to reimburse the owner or reimburse credit cards for proper corporate expenditures or directly pay the owner’s debts for and to the extent of proper corporate expenditures. It is not okay to pay the owner’s residence mortgage, credit card debts for personal expenses, and so on. Of course, it is vitally important that the corporation has a separate bank account and maintains separate accounting records. The accounting records should be records only of corporate income and expenditures. The form of the accounting records is not extremely important, but ideally the owner should have corporate accounting software or proper paper journals (cash journal, general journal and so on).

It is also extremely important to maintain the formalities of corporate record keeping. Every state requires at least an annual shareholders meeting, financial information to be presented to shareholders, regular directors meetings, and so on. It is important that the corporation has issued shares of stock to the shareholders and that there be proper records for subscriptions to the stock, authorizations to sell the stock and so on. There needs to be regular meeting minutes of the shareholders’ meetings and the directors’ meetings. By statute, a corporation is owned by shareholders who elect a board of directors. The directors appoint officers, but the directors are responsible for the day to day operations of the business by their supervision of the officers. In a single owner corporation, this does not make much sense, but that is the way it is. It is important to document the meetings and all actions taken at the meetings.  

Even doing all the recommended things may not be enough to protect you from personal liability on corporate contracts. The lesson is that nothing in the law is as certain as we would like. 


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