The Importance of Following Corporate Formalities

In some of my daily reading I ran across a post by Christopher G. Hill, a construction attorney in Virginia. It hit home because it feels like I’m continually working with clients helping them understand the importance  of how they run certain aspects of their business, and this is an area that often times gets ignored.

One of the things I do when I have a new client come to me, if they are in a lawsuit, is ask to see their corporate books.  I do this to make sure that they have been following the customary corporate formalities.  Most clients are always shocked as to why I would want to see them:  to see how exposed they may or may not be at being held personally liable in the suit they are in. I talked generally about it in this article: Online Corporate Formation You Get What You Pay For focusing on how you may not be getting all the knowledge you need to protect yourself personally with online corporate formation.

Well Mr. Hill in Virginia has a nice post on this topic with a real world example of an Engineering company’s owner who didn’t follow the corporate formalities and paid the ultimate price with a judgment that he is now personally liable for.  Here is an excerpt of his post:

“Under most circumstances, even in a case such as this where fraud could have been alleged, the claims against the principal of the company would not have worked out for the plaintiff.  However, in a somewhat unusual decision, the Henrico, VA court found that, aside from failing to keep separate corporate and personal books and failing to maintain the “corporate formalities” required for the basic protections,”
You can read the full article here: Incorporation May Not Be a Shield if You’re not Careful

In previous years, simply not having a corporate book and having yearly meetings was enough to obtain personal liability against a corporate principle.  While, Texas has modified these decisions some requiring more than one formality not being followed, most people think just forming a corporation is enough.  That could not be further from the truth.  Not following the corporate formalities essentially negates even having a corporation.   This is why forming a relationship with a good attorney and CPA can help you in the long run protect not just your business but your family’s assets.