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Importance of Corporate Formalities

"The very first thing as a litigator, I am going to ask for when suing an LLC is 'let me see your bank account; let me see your minute book.' If those do not document the separate legal existence of the LLC, the litigators' eyes are going to pop up and he is going to say 'I have a chance! I have a chance to pierce the corporate veil and get at the owners personal assets!'" quoting Richard E. Scrimale, Esq.

Under the law of Colorado and most states there is no requirement that a business owner keep any specific formal business organization or records, but in practice, it is critical to separate your business assets from your personal assets in order to maintain liability protection for your business.

This Basic LLC Outline is about what you need to know about piercing the corporate veil and holding the Members liable and what to do to avoid some of these problems. 

  1. Filing the Articles of Organization with the Secretary of State web-site is just the first step. This is not as simple as it appears. Make sure to check your corporate name in this and other states. Just because the Secretary of State accepts it doesn‟t mean it‟s not deceptively similar to an existing business. Make sure your registered agent is reliable.
  2. Get an EIN number from the IRS.
  3. Properly set up a business bank account completely separate from your personal bank account. NEVER co-mingle business and personal funds or assets, or pay corporate debts with your personal money, or transfer business property to personal use without documenting a profits distribution, or an asset sale or transfer, etc. There are lots of rules here. You need to know them or have the advice of someone who does.
  4. Make sure you‟re doing business in the name of the LLC by properly identifying the business entity in all business correspondence.
  5. If you are signing contracts, make sure you are properly signing the contracts in a corporate capacity in the name of the LLC and not yourself.
  6. Keep proper business records to properly identify corporate debts versus personal debts.
  7. Keep proper records to document investments to the business from personal assets or the member(s) directly.
  8. Most important: Have a professionally drafted Operating Agreement or Partnership Agreement by an attorney who is familiar with your business and what you intend to do with it. Do NOT download an Operating Agreement that is easily found online but typically doesn‟t cover a host of problems. “Free LLC Operating Agreements” – are worth exactly what you paid for it! Nothing at all in most cases.

Here is a checklist of Corporate Minutes so you can see what different items generally go into corporate record keeping;

  1. Formation Minutes for the company executed by the principals – noting the initial capital accounts.
  2. Stock Ledger (Membership Interest ledger for LLCs) addendum to the Bylaws or Operating Agreement indicating the principals' stock issued.
  3. Bylaws or Operating Agreement executed by the principals and approved by corporate minutes.
  4. Stockholder Agreement for any passive investors executed by the principals.
  5. Single-Purpose Entity Restrictions, addendum to Bylaws or Operating Agreement showing business restrictions and operating plan for the business if you have partners.
  6. Stock Certificates issued in the name of each principal.  
  7. Minutes authorizing each sale of property and the distribution of any profits interest on an annual or quarterly basis.
  8. Minutes authorizing the appointment or hiring of any corporate officers, employee agreements.
  9. Minutes authorizing major business transactions such as the sale or purchase of real property.

For more information call me at the number below or send me an email at [email protected]

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