Many people think the formation of a Corporation automatically means they cannot be held personally liable for the debts of the Corporation. While liability protection is one benefit of incorporating, the incorporation alone will not protect you. Often times, people just form the corporation by filing Articles of Incorporation. Once the Articles are filed, they return to “business as usual” and simply manage their day-to-day business operations. This is the mistake. Corporations are required to comply with annual corporate formalities. These corporate formalities include items such as filing a Statement of Information with the State, providing notice of annual meetings to all shareholders and directors, holding annual meetings to discuss corporate conduct, and memorializing annual meetings with corporate minutes. Unfortunately, there are many stories of local businesses failing to abide by corporate formalities and then learning this lesson the hard way as they watch their personal assets taken to satisfy a corporate debt or judgment.
In order to comply with California corporation laws, you have bylaws to adopt, separate accounts to create, shareholder and director meetings to hold, minutes to draft, stock certificates to execute, and other corporate records to maintain. A great place to begin after formation of the corporation is adopting bylaws. Corporate bylaws are the rules which govern the corporation. The bylaws should include language requiring annual meetings of both shareholders and directors. Those meetings must be memorialized and the document memorializing the meeting is commonly referred to as the “minutes”. Minutes should be prepared, executed, and retained in the corporate records book of the Corporation. In addition to bylaws, a corporation must issue the shares of stock to document who owns the corporation. Stock Certificates must be drafted, executed, marked with the corporate seal, and filed accordingly. The corporation then utilizes a stock ledger to track who owns what percentage of the corporation.
All corporate financial activities must be accounted for. A current balance sheet identifying the assets and liabilities of the corporation should also be maintained. A clear divide must exist between the assets which belong to the individuals who work for the corporation and the assets which belong to the corporation itself.
To properly utilize the liability protection provided by a corporate business entity, one must keep their corporation in compliance with all corporate formalities. Corporate owners who fail to heed this advice will watch their personal assets disappear due to corporate misdeeds.
Amir H. Afsar, Esq. is an attorney and founder of Afsar Law Group, A.P.C. which represents clients in business, real estate, construction, and estate planning matters throughout the Coachella Valley including Indio, La Quinta, Bermuda Dunes, Indian Wells, Palm Desert, Rancho Mirage, Cathedral City, Palm Springs, Banning, Joshua Tree, and other cities located within Riverside and San Bernardino County. Mr. Afsar can be reached at Afsar Law Group, A.P.C. at 760.345.3110.