Are You Complying with Corporate Formalities and Record-Keeping Requirements?
07/01/2025If you set up an LLC or corporation, you may think you’re automatically protected from personal liability for business debts. However, that protection only holds if you operate your company as a separate legal entity.
When Are You Personally Liable for Your Business’s Debts?
The general rule in New York "is that a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability.” The concept developed by the courts of “piercing the corporate veil” is an exception to this rule and, in certain circumstances, will impose personal liability on an owner or owners for the corporation's obligations.
In general, "piercing the corporate veil” requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury. Complete domination of the corporation is "the key" to piercing the corporate veil, in particular when the owner uses the corporation as a mere device to further his or her personal business rather than that of the corporation. However, there must also be "some showing" of a wrongful or unjust act toward the plaintiff.
Are You Complying with Corporate Formalities and Record-Keeping Requirements?
There are several indicia of a situation warranting veil-piercing, including the absence of corporate formalities, such as the keeping of corporate records that are part of the corporate existence, inadequate capitalization, and the transfer of funds into and out of the corporation for personal rather than corporate purposes.
The court looks at evidence that you are using the corporation for your personal benefit, such that the corporation is a sham. Observing corporate formalities and record-keeping requirements helps to establish that you’re operating the business as a separate entity.
Thus, in order to avoid being held personally responsible for the debts of the corporation, you must comply with corporate formalities and record-keeping requirements. For example, corporations must hold annual shareholder meetings to elect the board of directors and annual board of directors meetings to elect corporate officers, including President, Vice-President, Treasurer, and Secretary. The Board should hold monthly meetings to discuss pending projects and vote on important matters such as approval of major contracts, acquisition of other companies, leasing, and hiring of executive-level personnel. Importantly, meetings do not have to occur monthly if the votes on resolutions are by unanimous consent with prior notice. Meetings can also be virtual.
The Corporation’s secretary must maintain the meeting minutes and resolutions, recording the results of votes on such matters in the corporate minute book.
Any by-law amendments must be made at the annual meeting of shareholders by a majority vote of the shareholders present. Quorum requirements must be carefully followed, or any resolution can be later set aside. Stock Certificates must be issued to shareholders, signed by two officers, and the stock ledger book maintained as to who owns how many shares. Transfers of shares must be recorded in the stock ledger book.
What Are the Risks?
In my 30+ years as a litigator and corporate attorney, I’ve seen what happens when owners fail to take these steps. Courts can decide to pierce the corporate veil in a lawsuit, allowing creditors and other claimants to go after an owner’s assets, including their home, financial accounts, and real and personal property.
Neglecting corporate formalities can also affect other transactions. When obtaining loans from banks, the lender will request copies of these corporate housekeeping documents. Large leases of real property will require compliance with these corporate formalities by the landlord. Prospective buyers of the company or a new shareholder looking to make a sizable investment will also examine corporate records.
How Can You Protect Yourself?
Complying with corporate formalities can help protect owners from attempts by creditors to pierce the corporate veil.
Don’t risk personal liability. Have an attorney review your operations and corporate books regularly. The attorney can also help conduct the annual shareholder meeting and prepare the necessary shareholder and board resolutions or actions by unanimous consent. This is an investment in protecting you and your company.
If you need assistance, I can review your business operations and corporate books to assess your risks and advise you on how to address any concerns. If you have questions or concerns about your own business, contact me for a consultation.