Keeping Corporate Limited Liability

Is it possible to lose corporate liability protection?

If you want to protect and insure the limited liability of your corporation, you must take steps to so that it will be recognized as a corporation. Below are some ideas on how to keep your corporate protection (in other words assurance that in the event of a law suit your personal assets are protected):

Not identifying the business as a corporation.
Let creditors know they are dealing with a corporation. Place your corporate name on all signs, letterheads, bills, checks and everything else you use where the corporate name should appear. If you use a fictitious name then you must register it, publish it and renew it according to state law.
Not keeping your corporation in good standing.
A corporation must not be suspended or dissolved by the state due to non payment of a state fee, non filing of a state form (including income tax forms). Also, don?t voluntarily dissolve a corporation that has outstanding debts, the owners will be liable for the debts.
Undercapitalizing a corporation.
Did you invest too little in the corporation? How much did you pay for your stock in your corporation vs. how much you loaned to the corporation or how much potential liability is the corporation going to have in its daily activities. If these ratios are more than 4 to 1 or are not covered by insurance or some other protection, then the shareholders could be held personally liable.
Operate corporation as an independent entity.
A corporation is run by its board of directors (who appoint the corporate officers). Does the board of directors really make the decisions for the corporation or does the main shareholder make the decisions? Is every act a corporation does independent of other entities and shareholders?
Failure to sign as a coporation.
A major failure is for people to sign documents in the corporate name. For example, a corporation should always have documents made out in the corporate name and be signed by an officer acting on behalf of the corporation. For example, xxx as president of XYZ corporation.
Mixing assets..
Never have personal assets owned by a corporation or mix assets of another corporation in this corporation. Assets must remain separate and apart for each corporation and individual. Corporate assets must really belong to and be used by the corporation.
Mixing monies and funds.
Never mix personal money with corporate money. A separate and distinct bank account(s) must be maintained that are different than the bank accounts an individual person owns. If you mix funds with your corporation, you will lose your limited liability protection.
Keeping records.
Always maintain current corporate minute books and records. Failure to do so is an invitation to pierce the corporate veil and get your own personal assets. All corporations should have the following:
1. An actual corporate business address.
2. A checking account and ability to show cancelled checks for corporate expenses.
3. A corporate telephone listed in the corporation's name.
4. A corporate business license issued in its name.
5. Annual corporate minutes.
6. A profit motive for its transactions.

Failure to take at least these steps could result in the Alter Ego doctrine being imposed, the corporation being considered a Sham and personal liablility for the corporate owner(s).

Disclaimer: The information in these web pages has been prepared as a service to the community and does not constitute legal advice. This information may not apply to your situation particularly if you do not live in the state of California. Do not make legal decisions based on this material. Consult an attorney in person before making any important legal decision.