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Observing Corporate Formalities

The creation of a corporation by the filing of a certificate of incorporation and the holding of an organizational meeting establishes an independent entity. In order to maintain the fiction of separate existence and avoid a “piercing of the veil,” certain formalities must be strictly observed.
 
Meetings
 
The date for an annual shareholders' meeting should be in the bylaws. Bylaws typically call for an annual board of directors meeting to be held immediately after the annual shareholders' meeting. Minutes should be taken at the meetings.
 
Special meetings of the board should be held when matters of importance arise. Typical issues that should be addressed at a special meeting include the following:
 
  • Considering the sale, in whole or in part, of the assets or the dissolution of the business
  • Entering into a substantial funding commitment
  • Entering into a new lease
  • Opening a new bank account
  • Changing an officer's salary
  • Filling a vacancy on the board or appointing a new officer
  • Entering into a significant new venture
  • Entering into any other significant contractual agreement  
Good Business Practices
 
Directors and officers owe a fiduciary duty to the corporation, meaning that they must at all times do what is in the best interest of the corporate entity and its shareholders. Moreover, corporate matters should be kept confidential to the extent possible. Keeping a corporate record book is a must.
 
Other “musts” include the following:
 
  • Adopt a corporate resolution that authorizes an officer to sign a contract
  • Make all corporate purchases in the name of the corporation
  • Maintain corporate funds in a corporate account or accounts separate and apart from any other account
  • Carry reasonable insurance on the corporation, considering the risks inherent in the corporation's business
  • Make sure the corporation is funded at the time of incorporation with enough money to keep it going during an initial phase of operations
  • Set up a review mechanism for decision-making, so that all aspects of a proposed course of action will be considered
  • Comply with Articles of Incorporation, the Bylaws, and other organization documents or contractual restrictions 
Directors and officers should also develop a planning routine. This includes, but is not limited to, the following:
 
  • Review of each year's activities during the final month of the fiscal year
  • Budgeting for the longest period reasonably possible and reviewing and analyzing results at least semi-annually
  • Review of operations with the corporation’s attorney and CPA to ensure that tax planning is properly emphasized
  • Develop formal long-range planning capacities beyond the budgeting process 
What Not  to Do
 
Directors, officers, and shareholders should all be warned that the following actions could result in the piercing of the corporate veil:
 
  • Commingling corporate and personal funds
  • Using corporate accounts for personal loans or other personal purposes
  • Completing insider deals on loans, leases, etc., between the corporation and a principal other than on an "arm's length" basis
  • Using corporate assets for personal reasons

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