Are You Ignoring Corporate Formalities?

I ask this question knowing with a fair amount of certainty that most business owners would either answer with a definitive "Yes", or would simply respond with a blank stare confirming that they don't fully understand what Corporate Formalities are (much less why they are so important).

• I felt compelled to focus my latest blog post on this subject matter after a recent discussion with one of my trusted attorney contacts. The attorney was sharing with me yet another story of a business owner in crisis due to the piercing of his Corporate Veil . What made this story truly sad is that if the business owner had simply observed Corporate Formalities, the catastrophe that followed would most likely have been avoided. My attorney friend and I were in agreement that it is imperative that business owners understand what Corporate Formalities are and why they are so important.
• I have replayed that conversation muttiple times over the past few days which confirmed that I simply cannot focus enough on the education process surrounding these Corporate Formalities. I think most people understand that one of the most important reason to formalize your business entity is to create a protective layer between the business and personal assets of the shareholder, so it is perplexing to me that the idea of maintaining the integrity of that Corporate Shield is rarely given a second thought.
• The bottom line is this: observing Corporate Formalities is paramount in preserving the Corporate Veil and maintaining the layer of separation between your business and personal activities and assets. If you are unaware, or simply unwilling to take these steps, then the formation of your entity was a complete wast of your time and money.

If you are a typical business owner, I'm sure that you already have a full plate with overseeing the day to day operations of your business. However, I would encourage you to give some thought to Corporate Formalities and the role that they play in fully protecting your business. If you have been ignoring them, consider changing your practices. If you don't fully understand them in the first place, consider contacting me to learn more...

Can't I Just Do The Basics Now & Worry About The Rest Later?

I have heard this question countless times and yet it still causes me to shake my head in disbelief every time I hear it. The short answer is "yes, you can take this approach". However, it doesn't mean that you should. I could use this opportunity to launch a lengthy diatribe that would serve to outline my 144 point arguement against this, but I'll simply share a sad story instead:

• I recently learned about a situation that is ultimately going to cost a business owner dearly and at this point it appears unavoidable. Once upon a time a pair of family members decided to form a corporation and filed Articles of Incorporation with the MN Secretary of State's office. At the time, they were fully aware that they needed a number of other vital documents to properly complete the incorporation process, but were busy running a business and just assumed they'd get around to it later. They discussed a number of the key foundational elements, were in full agreement, and felt comfortable with their "verbal contracts".
• Fast forward about five years, and these guys are in serious trouble. They now find themselves in a litigious situation with an outside party and their "verbal contracts" are basically worthless. They have no Bylaws, no Buy/Sell or Member Control Agreement, and no clear documentation of how Shares were acquired. Sadly, this decision made several years ago is going to greatly affect their business and may even destroy it completely. If only they had spent a little bit of time and money to have their incorporation done properly, and subsequently maintained ongoing Corporate Formalities, they would not be in this situation today. Unfortunately for them, it is most likely too late.

While I wish this story was nothing more than that, a story, it unfortunately is a very real life situation that is far too common. I come into contact with these sad situations much too frequently and look forward to a day when they will hopefully be the exception, not the rule.

Please keep this in mind if you are considering forming a business, or may have already done so without the help of a professional advisor...

But Can't I Just Do This Myself?

You'd be suprised how often people ask me this question when it comes to Business Formation, Corporate Formalities, Corporate Governance, and Corporate Record Compliance. The short answer is "yes" you most certainly can, but that doesn't mean you can do it right or even do it at all. I am sure that I "could" do a lot of things such as overhaul the engine in my pick-up, or maybe even build my next home. However, I am smart enough not to attempt to do these things because I don't posess the knowledge or other qualifications to accomplish them. To lend a little more insight in this area, allow me to briefly zero in on a couple of these key areas:

• Many prospective business owners stumble accross the Articles of Incorporation templates provided on the Secretary of State's web site, fill it out, and send it in with their filing fee. They then assume (wrongfully so) that they own a company and are authorized to operate it. They never bother to read the fine print on the forms that states that this is simply basic information recquired by the Secretary of State's office and may not be suitable documentation for the formation of your entity. They do not have all of the additional foundational documentation that establishes ownership, how ownership was acquired, who has been appointed to govern the entity, who the officers are, what authority the carry, bylaws, stock certificates, a stock ledger, etc. It is only a matter of time before the "can't I just do it myself" approach catches up with them in a big way.
• A majority of all business owners think that they can manage Corporate Formalities, Corporate Governance, and Corporate Record Compliance issues on their own as well. However, once I begin to educate them on what is required, advise them of some of the serious consequences should they continue to fail in these areas, and demonstrate that they are already face substantial risk... then they begin to realize that they may need help. While it doesn't happen often after they have been fully educated, from time to time I will still get the question "can't I just do this myself?" It is pretty easy to put it to rest when I point out that they obviously haven't been addressing these areas within their business so what makes them think they will do it now...

While I could go on and on with this post, I will end here (for now) and address this further in one of my coming posts!

Are You Really a Business?

Many times I find myself talking to a "business owner" and find myself holding back from asking them what I really want to ask them... "Are you really a business?" I am amazed at the number of business owners who never take the steps to incorporate or formalize their business entity. Forming an LLC or a Corporation is one of the most important steps that you could ever take, yet so many people never take it. You may be asking yourself, "why do these things matter?" Let me share a few of the reasons with you:

• First and foremost, forming an LLC or Corporation provides you with a layer of separation between your business and personal assets. In my opinion, many business owners don't lend much consideration to the liability & exposure that goes along with owning a business. Creating a liability shield around your personal assets and maintaining separation between business and personal activities is crucial.
• Secondly, there are certain tax advantages that can be utilized within a Corporation. Many business owners have no idea that they are subjecting themselves to some unnecessary taxation because they are not incorporated.
• Finally, there is a level of credibility and legitimacy that you gain when you formalize your business and add "LLC" or "Inc" to your name. Think of it as an accreditation process that you should go through...

If you found these thoughts interesting, or if they caused you to do some thinking of your own, give Safe Shield a call for more information.

What are Corporate Formalities - Part 2?

My last blog article referenced Corporate Formalities and was good food for thought for many of us "typical business owners". The bottom line for most of us is that we have so many things that need our attention that it is virtually impossible to keep tabs on everything (thus our need for help). I'd like to take a moment to look a little more closely at Corporate Formalities and some specifics:

• Accounting Practices are a very important aspect. It is paramount that you have separate bank accounts for your business (separate from personal accounts). If you are like many business owners you may own multiple companies. You must have a separate account for each entity and keep separate, and accurate, financial records.


• Business Expenses need to be tracked and accounted for properly. You should never pay personal expenses out of a business bank account and if you do pay business expenses with personal funds, be sure to record it in the company records or submit an expense report. If you are a multiple business owner, as referenced above, be sure that you are not paying the expenses for one company from a different company's account. This would be considered co-mingling of funds, which is a felony.


• Corporate Records are different from accounting records. Corporate Records include your Articles of Incorporation, ByLaws, Meeting Minutes, Stock Certificates, Stock Ledgers, etc. It is very imporant that a detailed, organized Corporate Record Book is kept and updated regularly. This means regular reviews and review documentation is crucial and if you have read my blog in the past, you are well aware that I have covered this extensively.


• Government Filings are another important matter to be aware of. In addition to making sure that tax returns and financial records are addressed, you also need to make sure that your annual filing requirements are made at both the state, and federal, government levels.

There are additional components of Corporate Formalities, perhaps I will cover them next time???

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).