What are Corporate Formalities?

If you are like most business owners I know, you have way too many things on your plate and way too few hours in the day. So when you hear terms such as "Corporate Formalities", it is understandable if it's in one ear and out the other. So what exactly are Corporate Formalities and why are they important? The answer to the first question is fairly short and sweet, but the answer to the second... not so much.

• Corporate Formalities are simply the actions that a business owner performs to demonstrate separation between the business entity (and its assets), and his/her personal activities and assets. Conducting regular reviews, proper documentation of reviews, meeting filing deadlines, keeping complete financial records, detailed meeting minutes, adherance to the corporation's bylaws and other governance requirements... are all key components in observing Corporate Formalities.


• The Reason Corporate Formalities are important is that in order for a business owner to be fully protected personally by their Corporation or LLC, practicing Corporate Formalites on a regular basis is an absolute must.


• Sadly, the failure to properly observe Corporate Formalities is one of the most common misteps amongst business owners, and potentially one of the most costly.


• Failing to observe Corporate Formalities is essentially stating that there is no separation between the business itself, and you, the owner, as well as all of your private assets. If there is no demonstration of separation, the main purpose of the entity is completely negated and the business owner is left exposed, and at risk.

Who is making your required filings?

All businesses have regular filings that must be made, but who is actually responsible for making them?

• "I think my CPA is handling this for me" you might say. This is a very popular answer to the question, but it isn't necessarily a good one. Some CPAs will take care of filings for you as a value add to their traditional services. However, assuming that they are doing it for you can be a costly mistake.


• "My attorney takes care of all of those details for me" is a common thought. Are you serious? I am surprised at how often I receive this type of response, particularly since it is almost never true. Attorneys generally do not handle annual filings unless you are paying them a monthly retainer or other type of regular management fee.


• "I don't have time to deal with that so I am not going to worry about it" might be your first thought. While you may not have time to deal with it, you better believe that you should be concerned about it because it is ultimately YOUR responsibility. This doesn't mean that you have be the one to do it yourself, but you definitely need to make sure that it is taken care of (on time).


• "So if it is my responsibility, what happens if I don't do it?"This is not necessarily a short answer as there are a number of possible repercussions. At the very least, your business will be placed on Inactive Status with the Secretary of State's office and you are no longer considered to be in Good Standing. You can file for reinstatement, which will require a fee, but reinstatement is not guaranteed. Once you are placed on Inactive Status, it is possible for someone else to form an entity using the same name that you have operated with.

You may also want to consult with a professional advisor as there may be other filings or required certifications that may need to be addressed (depending on your business type).