Adhering to Corporate Formalities
Forming a corporation is a great way to protect yourself from debts and other liabilities incurred as part of your business. The corporate form also makes it possible to raise capital by selling shares in your company while still maintaining some managerial control. However, the corporate form does not come without a price. Corporations must adhere to strict formality and recordkeeping requirements. Those that fail to do so could find their shareholders personally liable for the debts of the corporation.
Corporations must meet several structural requirements. They must usually have a board of directors with broad managerial authority, as well as officers who handle the day-to-day operations. In many corporations, the shareholders elect the board and then the board elects the officers. The formative documents of a corporation can, however, alter the traditional roles of the shareholders and board to some degree. As such, entrepreneurs should have a clear idea of their goals and expectations and consult an experienced business attorney before filing documents with the relevant governmental authority — such as Washington, D.C.’s Department of Consumer and Regulatory Affairs.
After completing formation, corporations must continue to adhere to some formalities to retain their status. Depending on the jurisdiction, corporations must file biennial or even annual reports, and must usually hold periodic meetings of directors and shareholders and keep records of these meetings. In addition, corporations must keep separate financial accounts, as commingling corporate and shareholder funds or undercapitalizing can, in some instances, be grounds for stripping a corporation of its liability protection should it face a lawsuit. A knowledgeable corporate attorney can help protect the interests of your corporation.