The Obligations of Incorporation

If you choose to incorporate your business or organization, you may think the worst of it is filing the articles of incorporation (or, of course, filing your taxes). You may think your corporation protects you from financial and legal liability. However, corporations have additional requirements that other kinds of businesses don’t, and if you’re not diligent about fulfilling them, there can be serious legal consequences.

First, all corporations, whether they are for-profit or non-profit, need to keep their own separate bank accounts and financial records, independent of their owners or executives. Second, all corporations must hold meetings for their board of directors to dictate the direction of the company, as well as shareholder meetings to elect those directors and vote on changes to the corporation’s bylaws. Third, a corporation is supposed to have executives who manage the day-to-day operations of the company. All of this remains true, even if the corporation is owned and operated by one person, or by a small group of people that share the roles of shareholder, director and executive.

These obligations can seem bothersome, especially for a small business or organization that doesn’t have large scale operations to direct. However, there is a reason for all these requirements: a corporation is meant to be a separate legal entity from the people who own and run it, due to something called the legal fiction of corporate personhood. That legal fiction is what provides you protection from creditors and lawsuits, if your business or organization happens to get sued or suffer financial hardship.

However, if you do not maintain that fiction by failing to maintain separate finances, hold shareholder meetings and board meetings, or appoint executives, a court could decide that your business or organization no longer benefits from the protections of incorporation. If that happens, in a process called “piercing the corporate veil,” your own personal finances or property could be targeted by creditors and plaintiffs in lawsuits against you. Not only might your business fail, but you could personally incur massive debts, or even go bankrupt, trying to satisfy the liabilities your corporation was protecting you from.

If you’re looking to start your own corporation, whether for a business or for a non-profit organization, or you have questions about running your corporation, it is worth your time to speak with an experienced corporate law attorney. The attorneys at Wingate, Kearney & Cullen, LLP have handled many corporate and business law matters on behalf of their clients. For more information or to schedule a consultation, call (718) 852-5900.