4 Reasons Your Corporation Might Not Be Protecting You

Every business owner hears it.  You have to incorporate in order to be able to protect your personal assets from business liability.  Often, though, many small business owners do not actually take the time to research and investigate what it means to be a corporation and what the requirements are to have your business operate as a corporation and receive that liability protection.  Here are 4 common things that small business owners are doing that may place the treatment of their business as a corporation in jeopardy:

1) Failure to Properly Organize the Corporation

This is probably the most common mistake that I have seen small business owners make.  Especially in a state like Florida.  Many small business owners either file their information with the state themselves or use a service like LegalZoom to do the filing for them.  What they don’t do though, is sign organizational documents or even create them.  In most states, you are required to have some basic formational documents signed by the individuals involved in setting up the corporation.  If you have not created or signed these documents, you have not properly formed your corporation and run the risk of losing that liability protection.

2) Inadequate Organizational Structure

Each corporation is required by statute to have certain ‘management’ positions filled in order to be treated like a corporation.  For example, the shareholders should elect a board of directors who in turn will select officers of the company.  These positions need to be filled even if your corporation is very small.  Take a look at opportunities to build a board of directors with people who are motivated and connected.  They will be a great resource in moving your business forward and will help you meet the legal requirements of your corporation.

3) Lack of Ongoing Documentation

Corporations are also supposed to maintain corporate books.  This means that there needs to be a document recorded for each shareholders meeting and board of directors meeting that you hold.  Major actions of the company should be documented by resolution and filed with the company books.  Your annual report should also be documented as well as any additional compliance documents.  Most small business owners are not properly maintaining their corporate records and run the risk of losing their corporate status.

4) Acting Outside the Scope of Corporate Authority

Finally, you need to be careful of the actions that you take when acting on the behalf of your company.  If you do things that are outside the scope of your corporate or business responsibility, they can create the risk of personal liability.  Each company, area and industry is different, so this needs to be managed on a case-by-case basis.

By way of disclaimer, each situation is different as the laws differ from state to state and industry to industry.  This article is written with a general audience in mind and should not be considered as personal legal advice.  If you have a question or concern about your own compliance, I would highly recommend contacting a business attorney in your own state.

What do you think about that?