Remember to Follow All Corporate Formalities
In order to maintain the protections that forming a corporation or limited liability company (LLC) provide, all corporate formalities must be followed. A failure to follow these requirements can result in the loss of the right to operate, the loss of limited liability protection, and the inability to pursue or defend a lawsuit.
The following are some important corporate formalities that must be followed:
- Separate Bank Accounts: Corporations and LLCs must maintain separate bank accounts to avoid commingling of funds. Commingling of funds occurs when an owner’s personal funds are mixed with those of the corporation or LLC. A failure to maintain separate financial accounts can lead to the state of formation or the Internal Revenue Service (IRS) to assess penalties on the corporation or LLC. Additionally, it may lead to a loss of personal liability protection, meaning the personal assets of the owner may be placed at risk.
- File Documents: In California, corporations and LLCs are required to periodically file a Statement of Information and pay a fee. Other states have different requirements in regards to documentation, but all mandated documents must be filed in order to avoid penalties or a suspension of the ability to operate.
- Signing Documents in Corporate Capacity: Agreements, bank accounts, and all other transactions must be executed in the exact name that was used in the formational documents of the corporation or LLC. A failure to enter these transactions in the corporate capacity can place the corporation or LLC at risk of litigation and challenges to the validity of the transaction.
- Register a DBA: Any name that is used that is different from the corporate or LLC name must be registered as a DBA (“doing business as”) as required by the state in which the name is being used. Failing to register a DBA may lead to a finding that the corporation or LLC is improperly operating.
- Foreign Corporation Registration: As a company grows, it may begin to operate outside of the state of formation. Every state requires a foreign (out-of-state) business to register with it in order to conduct operations within the state. Failing to register with the state may result in a finding that the corporation or LLC is operating improperly. This can lead to the inability to enforce agreements in that state. Some states will treat the company as a sole proprietorship, which places the owner at risk of personal liability.
It is important to keep in mind that the above are just some of the formalities that corporations and LLCs must follow. While most corporate formalities are fairly simple to adhere to, it is too often the case that business owners fail to follow them. Unfortunately, this can lead to significant unexpected consequences.
Small Business Help
Owning and operating a business has many benefits, but also presents certain challenges. For more information about forming and running a corporation or LLC, speak with an experienced business law attorney today. At the Royse Law Firm, we provide help with all aspects of operating a company, including company formation and tax considerations. We proudly represent individuals in the Los Angeles, San Francisco, and Palo Alto areas.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.