Limited liability is an important advantage provided by corporations and limited liability companies (LLCs). The personal asset protection that corporations and LLCs provide for their owners, however, is not absolute. To maintain the liability shield, owners must comply with certain corporate formalities required by state law or recommended as a best practice. In addition, observing these formalities is a means of providing the accurate documentation and records needed for a business to operate successfully.
Limiting Personal Liability
Under some circumstances, the owners of a corporation or the members of an LLC can lose their limited liability protection and be held personally responsible for the obligations or debts of their business. This is known as “piercing the corporate veil.”
Without the liability shield that establishes corporations and LLCs as legal entities separate and distinct from their owners, many individuals would not engage in business due to fears of being held personally responsible for a business’s actions, debts, and obligations.
LLCs are generally subject to fewer legal formalities than corporations. However, for both types of entities, following basic operating procedures such as holding meetings, keeping records, and establishing separate bank accounts for the business helps to maintain the liability shield. These formalities also help establish that a business is a distinct legal entity separate from its owners, which precludes creditors from pursuing the owners to satisfy the business’s debts or obligations.
Maintaining Accurate Business Records
While maintaining a corporation’s or LLC’s separate entity status is arguably the most important reason to observe corporate formalities, it is not the only reason. Corporate formalities also help create and maintain the body of information, data, knowledge, and experience that a company accumulates and needs to maintain for its future operations.
These records are a valuable business asset with numerous applications, including the following:
- Innovation and problem-solving: Corporate records can help organizations identify patterns and trends that could lead to the development of new products, services, and business models.
- Informed decision-making: Business documentation can be used to make informed decisions based on data and records.
- Improved collaboration: Good recordkeeping enables workers to share information and learn from each other.
- Tracking progress and forecasting: Careful documentation is useful for tracking the long-term progress of prior plans and proposals and making more reliable predictions and forecasts.
- Business continuity: Corporate records document insider knowledge, promoting continuity of operations when there is employee and leadership turnover.
- Legal disputes: If a legal dispute arises between the business and an outside party or among owners, corporate records can provide key evidence (e.g., what was said in a meeting or the specifics of a financial transaction).
- Tax matters: Detailed business records are indispensable for tax planning and payment.
Proof of compliance: A business may need to demonstrate its compliance with legal obligations to various governmental bodies, including local licensing agencies, the state attorney general’s office, and the Internal Revenue Service.
How We Can Help
Having an experienced business attorney, like Margaret, who understands the law and the risks that businesses face, internally and externally, can provide businesses with a professional, objective, top-level view of corporate formalities. We want to help business owners ensure they are observing the formalities necessary to protect themselves against personal liability for the business’s obligations and debts and maintain essential records needed for the business’s operations—whether legally required or recommended best practices. Call us Monday-Friday 480.525.6244 for more information or visit our website to setup an appointment.
