What Are “Corporate Formalities” And Why Do They Matter?

Orange County business attorneys help companies to select the right kind of business structure. Many different factors go into the selection of the type of business entity that is right for an organization. Knowing what type of business entity a company should create requires a careful consideration of tax issues, as well as an understanding of whether or not the business structure will provide any protection from liability. Ease of transferability and restrictions on ownership may also matter when it comes to the choice of business form. 

Because there are so many different considerations, companies who are starting up, expanding operations, or simply looking to restructure, should talk with an experienced attorney about what their best option is for their particular organization. Once you make the effort to select a business entity, and once you make the effort to go through the incorporation process, you want to fully benefit from the protections that the particular type of business structure is supposed to provide to you.

Unfortunately, many people who decide to incorporate and to operate as a corporation will make mistakes once their business has been created. One big mistake which could actually cause a company owner to lose the benefits of incorporation: failure to maintain corporate formalities.

What are Corporate Formalities?

When a corporation has been formed, the business has a separate legal identity from the owners of the company. Because the business exists as a separate “person” under the law, owners are generally shielded from liability and can lose only their financial investment in the business if something goes wrong. However, for the business to actually exist as a separate entity – which is key to maintaining the liability protections that are in place – corporate formalities must be maintained.

Some examples of corporate formalities include:

• Maintaining separate financial accounts for the business and not co-mingling personal funds with business funds. Even if a business has only one owner who also operates the company, the owner must be treated as any other “employee” as far as maintaining separate money and assets.
• Keeping accurate records: A company should have accurate financial records as well as records of meetings and corporate activity.
• Holding regular meetings: Corporations must have an annual shareholder’s meeting. This is true even if there is only one shareholder of the company. The shareholder’s meeting should be held at a time that is specified in the corporate bylaws. If important developments occur, such as an officer’s salary being changed or a new business venture being undertaken, then a special meeting should be held. Minutes should be kept at all meetings so there is proof that these meetings took place.
• Maintaining fiduciary duties: All officers and all directors of a company are fiduciaries. They must act in the best interests of the business, and must not engage in activities that would be a conflict of interest or divert business opportunities to themselves for personal enrichment.
• Following company bylaws: When a company is created, there should be company bylaws and there should be articles of incorporation. These should set forth specific guidelines that the company and its shareholders should follow.

These are just some of many examples of what corporate formalities are. Orange County business attorneys can provide more information on corporate formalities, and can advise you on whether or not you are in compliance with the obligations that are necessary for you to maintain the corporation as a legally-valid separate identity distinct from you.

If you fail to follow corporate formalities, you could find yourself facing legal liability that the corporation is supposed to be protecting you from.

Getting Help from Orange County Business Attorneys

Orange County business attorneys can help you with all aspects of structuring your business as a corporation and maintaining your business as a separate corporate entity. We can guide you through the incorporation process, help you to determine which type of corporation – C corp or S corp – is the right choice for you, and can assist you with following the corporate formalities you need to maintain liability protections.

Whether you are just starting your business or you want to expand or modify your corporate structure to provide more protections for your wealth, Brown & Charbonneau, LLP can provide the guidance you need to make informed choices about all aspects of business organization and operation. We help companies of all stages and during all stages of development. To find out more about the legal services that we can provide to your organization, give us a call at (866)237-8129 or contact us online today.