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Five Easy Steps To Protect the Corporate
Shield
Creating a corporation is an easy
and inexpensive way to avoid liabilities, but its not infallible.
By Timothy R. Hughes, Esq.
Most savvy business people are aware that corporations offer
some protection to officers, directors and shareholders from
personal liability. What many people may not know is that
the corporate shield from personal liability is not infallible.
These are five simple steps you can take to maintain corporate
protections and avoid personal liability.
1. Avoid Tortious Conduct
The most obvious step is to avoid committing any torts. Examples
of tort claims are negligence and fraud, in contrast to contracts.
The corporation generally shields owners from liability for
corporate debts. It does not, however, eliminate liability
for your own torts.
For example, if you wreck the company car and hurt another
driver, you may be personally liable for negligence. In contrast,
the corporate shield may still protect you from personal liability
if another employee is in a wreck. That would be an example
of blocking personal liability for a corporate debt.
2. Do Not Treat Corporate Money
Like It is Your Own
The corporate shield hinges upon the legal fiction that a
corporation is a legal entity separate and apart from its owners,
officers and directors. To maintain this legal fiction, you
must treat the corporation like it is a separate entity.
You should keep separate books and financial accounts for
the corporation. You would be surprised how many people write
checks directly from their corporate accounts for personal
debts. This sloppy and dangerous practice may result in piercing
the corporate veil.
3. Disclose Your Corporate Status
You should properly identify the corporation at all times.
For example, business cards and advertising should include the
proper corporate name of your entity, including "Inc.",
"Co.", "Corp.", or other appropriate monikers
denoting a corporation. Your letterhead and stationary should
include the same information. Last, but not least, any contracts
entered into by the corporation must have the proper name including
corporate designation. Signing a contract and not including
the right name is a very easy way to become personally liable
for all breaches of contract.
4. Be Very Careful Changing Business
Entities
Companies sometimes close one corporation and open another.
When doing so, you need to be very careful to avoid unintentionally
inheriting the prior corporation's debts. Conducting a similar
business in a similar location or having interlocking sets of
officers, directors, and ownership can create problems.
5. Observe Corporate Formalities
Most reported cases which permit a party to pierce the corporate
veil reference a failure "to observe corporate formalities".
This exposure is very easy to avoid. If your by-laws indicate
there will be an annual meeting of shareholders, hold the
meeting. Take minutes of the meeting, sign them, and place
them in a corporate notebook. The same holds true for meetings
of boards of directors. Decisions requiring approval of the
shareholders or board of directors should reflect a meeting
and a decision.
With smaller corporations, you can hold meetings at most
any place or any time so long as proper notice requirements
are met. Notice can generally be waived in writing by the
shareholders or directors, so the "shareholders meeting"
really can be ten minutes with a bagel and cup of coffee in
the office before work. With publicly held corporations, the
requirements for time, place and notice become more cumbersome
and infinitely more critical to follow.
Conclusion
I often tell clients that creating a corporation is the cheapest
investment to avoid liability they will ever make. Corporations
are not a complete panacea, but they can be excellent tools
to protect personal assets. It is critical for officers, directors,
and shareholders to take these simple steps to maintain the
effectiveness of corporate protection.
Timothy R. Hughes, Esq., is the principal
of the Northern Virginia law firm of Hughes & Associates,
P.L.L.C. He specializes in construction litigation, corporate
and business related representation, and complex civil litigation.
He may be reached at tim@hughesnassociates.com,
or by phone at (703) 671-8200.
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