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Saturday, September 29, 2012

No Corporate Formalities, No Loan!

I've often written about the risks business owners face due to the Piercing of their Corporate Veil for failing to observe the necessary Corporate Formalities.  I speak with business owners about this frequently as more and more of this activity occurs every day, but there is more to this story than that.

Did you know that the failure to observe Corporate or LLC Formalities can also hinder, or negate, your ability to qualify for a bank loan?  I am contacted regularly by bankers whom I work with because they are going through the loan process with a customer and the business owner does not have the proper Corporate or LLC documents that establish them as the business owner, officer, or director who has the authorization to enter into such an agreement with a bank or other financial institution.

Often times the Corporation or LLC was not properly formed and the foundational paperwork is a mess, or in many cases does not even exist, so there is no formal documentation to reflect the ownership of the entity, how it was acquired, who is authorized to represent it, and what the rules and guidlines are that the company operates under.

Just last week I spoke with a business owner who is in the midst of the loan process and his bank is requesting that he provide them with documents that do not exist.  He assumed that since he filed Articles of Organization with the Secretary of State's office that he has a fully established entity and that is simply not the case (in fact it's far from it).  He has no operating agreement, organizational resolutions, contribution agreement, membership certificate, membership ledger, tax id number, etc.  He has a huge gap and is trying to finalize the loan process, but the process has stalled and cannot move forward without a fair amount of work being completed.  The most interesting aspect of this is that he is financially sound and should have no problem qualifying, provided that he has all of his ducks in a row.

I believe that the concept of "No Corporate Formalities, No Loan" is valuable information that many business owners are completely unaware of.  If you fall into this category, I hope you will review the information and do a self-check of your business.  You may also want to consider sharing this information with other business owners that you know.  As always, you should feel free to contact Safe Shield for more information.

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