Failing to Keep Your Corporation in Compliance Can Expose You to Personal Liability

These days, many Mom and Pop businesses are being run as corporations. These closely-held corporations are typically owned and managed by one or two people; thus, the shareholders are typically also the only officers and directors. One of the benefits of operating as a corporation, as opposed to a sole proprietorship, is risk-management. The owners are protected against liability for corporate debts and obligations.

However, neglecting to maintain the corporation in compliance with its bylaws and state law can open-up liability on the part of the shareholders. As a business litigator, it is not uncommon to see shareholders of a close-corporation being sued for a corporate obligation. In certain circumstances, a court may refuse to recognize the separateness of the corporation from the principals and “pierce the corporate veil,” resulting in a finding of liability as against the individual principals. The legal term for this theory of liability is called “the Alter Ego Doctrine” and it refers to the circumstance where the court will disregard the corporate form and hold the corporation’s principals individually liable for a corporate obligation. This theory of liability is often alleged in situations where the corporation has little-to-no assets or is dissolved.

One of the factors considered by the court in determining whether a principal should be held liable for the corporation’s obligation is whether there was a disregard for corporate formalities. In other words, was the corporation maintained in accordance with its own bylaws and applicable state law? Often times, what I discover when dealing with closely-held corporations, is that very little has been done to maintain the corporation. For example, Statements of Information have not been updated, stock certificates have not been issued, shareholders’ meetings and board of directors’ meetings have not occurred or meeting minutes have not been prepared.

In my experience, this neglect occurs because the principals are given no guidance as to how to maintain the corporation after the corporation is initially set-up. With all of the time that goes into running a business, it is not surprising that corporate compliance is often times overlooked until it is too late and the principals find themselves in litigation having to defend themselves from personal liability for a corporate obligation. For these reasons, we offer a Corporate Maintenance Plan for a flat fee and make sure that the corporation is maintained appropriately so that our clients can focus on what is most important– the successful operation of their business. Ensuring that your corporation is maintained in compliance with state law and its own bylaws is a simple way to protect yourself from personal liability for a corporate obligation.

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