Legal Requirements for Maintaining Corporate Status

Corporate status, or a corporation business structure, may be the right choice for a business you intend to start, but establishing and maintaining corporate status may involve some careful decision making on your part. If you have already started a business, you may change its legal structure as you go through the company’s life cycle.

Attaining Corporate Status

Changing the business format is common once business owners have established a successful, growing enterprise. Owners who start out with partnerships may want to incorporate into an S-corporation or a C-corporation once the business starts generating more income or to get funding from outside sources or to protect assets. However, once you do incorporate, there are minimum standards for maintaining corporate status that must be followed. Failure to follow these standards will cause you to lose the liability protection that incorporation offers.

To obtain corporate status, you must file articles of corporation, your stock divisions between shareholders and owners, and the corporate bylaws with your state. You will also need to notarize and sign all documents required by your state, and obtain an employer identification number if you don’t already have one. Once you have completed this sustantial paperwork, you have created a C-corporation. The corporation will stay a C-Corporation unless and until you elect to be an S-corporation.

The Benefits of Corporate Status

Once you have secured corporate status, you have gained the primary benefit of LIMITED LIABILITY. This means that shareholders and officers are not personally responsible for the corporation’s debts or judgments against the corporation. This is the single most important reason people use the corporate form of doing business–to safeguard personal assets. (In contrast, sole proprietors and general partners in a partnership are personally liable for all debts and obligations of the business, such as loans, accounts payable, and defective products.)

The protection of corporate status is not limitless, however, and if someone who is suing you “pierces the corporate veil,” then you could be held personally liable for a judgment against you. Ensuring that you keep your corporate status is relatively easy, as long as you follow the rules of the corporation.

Each state has its own laws governing the actions that can pierce the corporate veil. As long as the corporate veil remains intact, the corporation and the individuals who own it remain completely separate entities for the purposes of liability. If a court finds that the actions and interests of the corporation and its officers are so united that they cannot be distinguished, then the benefit of the corporate veil will be lost.

Generally, if the officers of the corporation follow the rules of the corporation, act in good faith, avoid wrongful acts, and act within the scope of their duties in the corporation, then the corporate veil will remain in place. Corporate rules may include maintaining records, holding annual meetings, and maintaining all required filings with the state. It is also important that a shareholder never mix his or her personal assets with the corporate assets.

Courts will often determine that the corporate veil has been pierced when the corporation’s officers or directors engage in criminal activity, or it is determined that the corporation was set up with the intent to defraud. Courts will also look to see how much the corporate officers are using the corporation to advance their personal interests.

Getting Help

Questions about maintaining your corporate status in your particular situation can be best answered by a corporate lawyer. Your state’s Secretary of State website is also a good place to find information about maintaining corporate status and following corporate standards.

Case Studies: Legal Requirements for Maintaining Corporate Status

Case Study 1: Transitioning From Partnership to Corporation 

Business owners, Mr. Alpha and Ms. Bravo, initially operated their consulting services business as a partnership. As their enterprise grew and generated more income, they decided to incorporate into a Corporation to protect their personal assets and access external funding.

They successfully filed the necessary articles of corporation, established stock divisions, and created corporate bylaws. This case study highlights the importance of changing the business format to meet evolving needs and the initial steps involved in attaining corporate status.

Case Study 2: Upholding Limited Liability Protection 

Charlie Corporation diligently followed the rules and regulations to maintain its corporate status. The officers of Charlie Corporation maintained records, held annual meetings, and fulfilled all required filings with the state.

By adhering to these standards and avoiding wrongful acts, Charlie Corporation safeguarded its limited liability protection. This case emphasizes the significance of corporate governance and compliance in preserving the benefits of corporate status.

Case Study 3: The Pitfalls of Neglecting Corporate Standards 

Delta Corporation faced legal consequences due to the failure to meet corporate standards. The officers of Delta Corporation neglected to maintain required records, skipped annual meetings, and failed to fulfill certain filing obligations.

As a result, a court pierced the corporate veil, holding the officers personally liable for a judgment against the corporation. This case serves as a reminder of the risks involved when corporate standards are not diligently followed.