Idaho Business Law Importance of Keeping Corporate Formalities

By Lane V. Erickson, Idaho Business Lawyer

As the premier Idaho Business law firm, our team of Idaho business attorneys, have assisted numerous clients in the creation and operation of their businesses in Idaho. Whenever we help a client create a business, we also have a lengthy discussion with them about the importance of making sure that all corporate formalities are met at all times during the operation of the business.

The main reason that most people create a business entity in the first place, such as an LLC or a corporation is that they want to limit their own personal liability. In other words, the individual owners do not want to be liable for the debts, expenses, or liabilities that could arise within the business. The problem is, simply setting up the entity by itself is not enough to maintain the corporate shield that protects them individually. In other words, to keep creditors from piercing the corporate veil and making the the corporation’s debt the owners debt as well, the owners have to always observe and keep corporate formalities.

At the Racine law office our team of Idaho business attorneys understand the importance of keeping corporate formalities and have helped clients in meeting these legal requirements for more than 70 years. Our team includes partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Our attorneys have decades of experience, knowledge, and skill in helping business clients deal with all of their business needs.

The purpose of this article is to describe what corporate formalities are, to discuss a few that need to be met, and to explain why these are so important. This article is not designed to give legal advice but rather is just a starting place in helping educate you about the importance of all the things that need to be done to make sure that the corporate shield you have created will be maintained so that you are protected individually.

The first corporate formality that needs to be met is that all of the corporation’s governing documents are actually created and maintained. For a corporation, this would include the articles of incorporation and the bylaws. For an LLC this would include the certificate of organization and the operating agreement. For all of these entities, this also includes properly filing any annual reports with the Idaho Secretary of State’s office.

These documents should be amended, or revised anytime a change in ownership occurs. By doing this, the entity that you have created will be able to continue to operate based on its governing documents. If this is not done, and a dispute arises between the owners about how the business should be operated, this could result in protracted litigation, and it could also result in individual liability for the owners of the business.

The next formality that should be continuously maintained and updated would include making sure all of the required meetings for the entity are held. For a corporation this would include any meeting of the directors and at least an annual shareholders meeting. For an LLC, this would include a meeting of any of the managers of the business and it would also include whatever meetings are required and set forth in the operating agreement for the owners of the business.

In order for these meetings to be proper, there needs to be written notice given to either the directors, managers, or owners of the business. This notice is required to state the place and time of the meeting as well as the date. This notice should also provide a list of items that are going to be discussed and the business that will be completed during this particular meeting.

Then of course, the meeting actually needs to take place. Once the meeting is concluded, a record of everything that occurred during the meeting, including any voting, any business that was transacted, any changes in ownership that occurred, and any other type of business that would affect the ongoing operation of the entity should be recorded in a written document called minutes or notes.

Perhaps one of the biggest formalities that people have trouble with is keeping the finances of the business operating correctly. The single biggest mistake that most people make when it comes to corporate finances is that they fail to separate them from their personal finances. In other words, an individual may need to make a payment on their home. As the owner of the business, the owner would take the corporate checkbook and write a check out to the mortgage company to pay the mortgage payment. This is not proper because it comingles the finances of the individual owner with that of the actual entity. This is perhaps the biggest area where a creditor can determine that in fact they should have the right to pierce the corporate veil and go after the owner individually for any liability that exists in the business.

In order to avoid this the proper way to handle finances is to keep them completely separate between the business and the individual. If the individual needs somebody to help them personally, then a draw, or a salary payment, or a distribution, should be made from the corporation to the individual. The individual can then access those monies through their individual account properly without violating any corporate formalities.

This brings us to the last area where corporate formalities usually fail. This has to do with maintaining all corporate records. These would include a list of who the owners are and the actual percentages of ownership that they have. For a corporation this is kept in a stock ledger, for an LLC this would be reflected in the operating agreement itself. Additionally, the minutes from any of the meetings discussed above should be kept in an organized way in the corporate record book which could actually be a binder, or a filing cabinet, or an electronic file. In this way the owners of the business can go back at any time and review the notes or minutes from any of the meetings they have had previously.

Additionally, any actions that the corporation formerly takes should be kept in a corporate resolution document. These documents are often used whenever a corporation needs to get a loan from a bank, or sell property, or purchase property in order to continue maintaining its operations. The corporate resolution would be made by the governing body and would reflect the vote taken by that body to take the action listed in the corporate resolution. By doing this, all the owners of the business, and all third parties who are transacting business with the corporation, will know that everything has been done properly.

Again, the purpose of this article is not to exhaust all the different corporate formalities that need to be met in order to maintain the corporate shield. Rather, the purpose of this article is simply to point out some of the corporate formalities and the reasons why they are important. If you have questions about making sure that all corporate formalities are being met in your business, we are confident that we can answer your questions and help you.

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.