There are various reasons why business owners elect to incorporate and the privilege of limited liability is often at the top of their list.  It is important to remember, however, that it is in fact a privilege that’s granted and can therefore be taken away.  Business owners must recognize that it is called “Limited Liability” because their liability is just as it’s named to be – limited; not eliminated.

In order for a corporation’s directors, officers and shareholders to maintain the protection afforded them, it is essential that, amongst other things, corporate formalities are observed. What are corporate formalities?  They are formal actions that, by law, must be performed by the corporation’s directors, officers and/or shareholders on behalf of the corporation. Failure to observe and implement these formalities will not only diminish the protection afforded the corporation’s directors, officers and shareholders, but it can allow third-parties to “pierce the corporate veil” and subsequently hold those directors, officers and/or shareholders personally liable for what should have otherwise been corporate actions.

One formality that must be maintained is adequate corporate minutes.  It is imperative that significant corporation transactions, both internal and external, be properly documented. Failure to do so can serve as but one means for third-parties to “pierce the corporate veil.”  For example, undocumented officer compensation deemed by the IRS as excessive can result in a reclassification; amounts claimed as deductions can be viewed as dividends and consequently lead to increased, unpaid tax liabilities.  Infamous as well is the case for a plaintiff whereby it has become nearly commonplace to seek to hold both the corporation and its directors, officers and/or shareholders responsible for their claims.  Many times, they attempt to achieve this by proving that the corporation did not adhere to legal formalities such as its minute/record keeping.

Everything has its price but, the benefits received from investing some time into maintaining your corporation’s meeting minutes far outweighs the consequences you may endure by distributing that time elsewhere and leaving to chance the outcome of this legal requirement.

Tags: Business Needs, corporations, Limited Liability, Los Angeles business attorney