A corporation is a type of business entity that is separate and distinct from its owners.  One of the primary reasons a business person would want to incorporate is to limit an owner's personal liability for business losses and debts.  However, simply forming a corporation is not enough to maintain the protections of limited liability.  In business law, a corporation must always observe corporate formalities, whether the corporation has one thousand directors, or only one.

What You Need to Know About Corporate Formalities

What’s the purpose of a corporate formality?

"Corporate formalities" are operating rules and guidelines a corporation must follow in order to preserve its corporate protections, and ensure that the corporate entity remains legally distinct from its owners. These formalities include keeping separate records for corporate activity, having regular director and shareholder meetings, and maintaining separate and independent accounts for the corporation. These guidelines are often found in the corporation's bylaws, which are internal rules that govern the operation of a corporation

What are some basic types of formalities?

Some of the most common corporate formalities include:

• Holding regular meetings at specific times and dates and maintaining meeting minutes.
• Arranging special meetings when major corporate announcements occur.
• Maintaining accurate financial and corporate records.
• Complying with company Bylaws, Articles of Incorporation and related documents.
• Devising an intuitive business plan that protects the corporation from liability and establishes the company’s immediate and future goals

What happens when there are no formalities?

If corporate formalities are not followed, the corporation may lose its separate identity which may result in the owners being held liable for losses or liabilities. This is known as "piercing the corporate veil".   In that event, if the company incurs substantial losses or is sued by an outside source, its owners may be liable. Creating and maintaining the distinction between owner and corporation is an important business practice and essential for proper corporate governance.

How can a lawyer assist in the process?

Because it can be difficult to navigate on your own, it’s best to enlist the help of a business law attorney, especially if you’re concerned about a problem that occurs in your corporation. You can have a business attorney assist in ensuring that you’re properly enforcing all corporate formalities.

Clients seeking legal representation throughout Lihue and Hawaii, can turn to the trusted legal team at the Law Office of Dawn N. Murata LLLC. This established law firm takes pride in assisting clients with their business law concerns, whether you’re in the process of establishing your corporation and want to ensure that you’re abiding by all corporate formalities or dealing with a concern regarding wills and trusts. View their services online, or call (808) 245-4572 to schedule a consultation.