Image

PITFALL: Failure to adhere to corporate formalities

One of the main reasons we form corporations or LLCs is to avoid personal asset exposure for business liabilities. This “corporate (or company) veil” of protection that an entity provides can be “pierced” in certain circumstances and one of these piercing circumstances is “failure to adhere to corporate formalities.” This includes properly memorializing corporate actions in minutes or corporate resolutions, filing annual reports or statements, and maintaining a separation between personal and business assets. Owner/founders are often so busy operating the business that they fail to attend to these administrative necessities. They put them off, see them as annoyances and forget about them entirely. This can be a devastating mistake in the event of a lawsuit. Proper monitoring of business activities by a legal professional can go a long way in avoiding such mistakes.

Leave a Reply