How to Preserve Corporate Status and Maintain Limited Liability: Follow simple steps to preserve your corporate status and maintain limited liability.
If you are careless about maintaining the separation between the corporation and yourself, you can jeopardize your freedom from personal liability or certain tax benefits – the main reasons to incorporate. It is rare for a judge to disregard a corporation and impose personal liability on a shareholder, but it does happen. When it does it is almost always in a small corporation where the owner has allowed the line between the corporation and the owner to disappear.
Following these simple steps help preserve your corporate status and maintain limited liability:
1) Put adequate capital into your corporation. This means putting in enough money and other assets to meet your foreseeable business requirements. The amount will vary from business to business. Get advice from someone in that business or an accountant.
2) Insure against obvious risks. Is there a substantial risk to customers or others being injured because of your business? It is wise to obtain a reasonable amount of coverage.
3) Observe corporate formalities. Issue stock certificates to shareholders before doing business. Keep a corporate record book with Articles of Incorporation, stock records, bylaws and minutes of shareholder and director meetings. Hold annual meetings each year to elect directors and officers.
4) Separate your personal finances from the corporation’s. Your corporation needs its own bank account. Don’t use the corporate bank account to pay your personal expenses.
5) Use the correct corporate name. Use your full corporate name in all your business dealings. Put the corporate name on your stationery, business cards, phone book listings and on your Web site. Be careful not to use an abbreviated version of your corporate name unless you have filed for a fictitious name with the Secretary of State.
6) Sign documents as a corporate officer. Sign your name – "John Doe, President" – along with the name of your corporation, rather than sign just as an individual. This makes it clear you are acting as the agent for a corporation and not as an individual. If you must personally guarantee an obligation you should still follow this advice. It provides evidence that the corporation and you are separate legal entities.
7) Assign existing business to the corporation. If you incorporate an existing business (such as a sole proprietorship or a partnership) the old business may have contracts. It’s usually a good idea to formally transfer these contracts to the corporation.