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I`ve Incorporated. I`m Protected…Right???

Incorporating is only the first step in protecting yourself from corporate liability. Learn what you really need to do to fully protect yourself.
Latest posts by Nina Kaufman (see all)

You’re hot to trot with an idea for a fabulous new business. You remember a horror story about the “entrepreneur who didn’t incorporate,” who got sued, and lost all her personal assets.

Determined that won’t be you, you click onto BizFilings and form a corporation. You lean back in your office chair, take a deep breath, and feel mighty satisfied with yourself. You’re protected.

Right?

Not exactly. There’s more to it than the initial filing for a corporation (or limited liability company). Incorporating is only the first step. Once you get the liability protection “shield,” you have to make sure you keep it.

You Are Not Your Corporation

Your corporation has an independent existence that can, literally, outlive you. It has needs separate and apart from yours (such as a need to be able to pay its own bills). If you don’t treat the corporation properly as an independent "being," the privilege of shielding yourself and limiting your personal liability can be taken away from you.

To keep that liability “shield” in place, a corporation needs to observe certain formalities and take certain actions. These "formalities" include:   

  • Issuing stock   
  • Electing officers and directors
  • Keeping corporate records
  • Adequately capitalizing the corporation
  • Keeping personal and corporate funds separate

When a corporation doesn’t do these things, the corporation’s limited liability shield can be pierced by creditors . . . who can then go after your personal pockets.

Mighty Minutes

That’s where corporate minutes come in. Yes, it’s paperwork and seems stupidly formal, but a corporation must officially authorize its officers and directors to make major decisions on its behalf. And yes, this includes single-owner corporations, too. How do you know that a corporation has given authority? Because there are written minutes of a meeting, kept in the corporation’s books!

What’s Major? What’s Ordinary?

Does this mean you have to write down every time you go to Staples for pencils? Certainly not! Here’s a general rule: if the transaction is part of your regular course of business, it does not need to be documented. So Shelly, who is an executive coach, does not need to write up corporate minutes each time he signs an agreement with a new client. Or Natalie, a bookstore owner, does not need to write up minutes for each sale of a book off her shelves.

The corollary: transactions outside the ordinary course of business do need to be documented. Often, they are one-time (or only occasional) transactions. So Shelly’s paying $10,000 to create a website for his coaching business is not “in the ordinary course.” The website is not Shelly’s core business; coaching is. Similarly, Natalie’s hiring a contractor to renovate the store and put up bookshelves is not “in the ordinary course.”

What are other examples of major decisions or transactions?

  • Leases for, or subleases of, the business premises
  • Significant contracts (often that involve an unusually large commitment of funds)
  • Loans, credit lines, or getting other forms of financing for the business
  • Joint ventures
  • Designating corporate bank accounts and signatories
  • Mergers, reorganizations, or bulk sales of much of the corporation’s assets
  • Providing benefits to employees

Where’s the Fun in All This?

Meeting minutes are like a (summary) diary. And who doesn’t enjoy the memories that leafing back over diary pages of the past bring up? Memories can be of challenging learning experiences – like the strategic alliance (or other relationship) that didn’t quite pan out as planned. Or they can provide markers to your company’s change and growth over time. In one year, you may see minutes authorizing a loan for a significant equipment purchase. In the next year, you may have ratified a major contract, which you never could have contemplated had it not been for that equipment. Far from being a deadly chore, minutes can give you that very boost of encouragement you need to keep moving your company forward! Your legal counsel can help you with the form and timing to put them together properly.

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