Is Your Corporation in Trouble?

Studies show that most small, closely held corporations would not withstand the challenge of a lawsuit or IRS audit. "Why not?," you may ask, "I thought a corporation would protect me from liability." A corporation will protect you from liability, but only if you follow the "corporate formalities."

Use the following as a checklist:

• Did you hold organizational meeting and appoint a board of directors?
• Did your board of directors appoint officers?
• Do you have written minutes of these meetings?
• Do you have a Federal Tax ID number?
• Did you physically issue the shares of stock?
• Does your corporation have its own bank account?
• Do you "commingle" your personal funds with your corporate funds (i.e., do you use the corporate checkbook to purchase personal items and vice-versa)?
• Does your corporation have a business license?
• A telephone in its own name?
• A physical office address with a written lease?
• Do you have annual meetings of the shareholders and board of directors?
• Do you have written minutes of these meetings?
• Do you sign all of your leases, contracts and letters in the capacity which you are acting? (e.g., "President" or "Secretary").

Your failure to follow one or more of these formalities may result in a "piercing of the corporate veil." This is a legal expression for the process by which a court can actually penetrate the invisible wall of protection between you and your corporation and permit a creditor to go after you personally. Let me ask you a question . . . do you think IBM violates any of the above mentioned items?

The lesson here is that if you want to be treated like a legitimate corporation, then act like one! Go dust off that big, black corporate minute book that you tossed in the closet years ago. Look through the forms. It's not "rocket science" . . . it's simply a matter of keeping records in case of a lawsuit or IRS audit. You don't need to run your corporation with rigidity, you simply need a "paper trail" to justify what you are doing.

Here are a few tips:

If you use your spare bedroom as an office, have written lease between you and your corporation. Make it a "net" lease, so that your corporation can pay you for its share of the utilities, taxes and insurance on your home.

If you a constantly "funnel" money between your personal and corporation bank accounts, draw up a line of credit agreement between you and your corporation. That way, the "piecemeal" payments that go back and forth will appear perfectly normal (after all, isn't that what you do with a credit card account?).

If you need a legitimate office and phone, consider an "executive suite." There are companies that will rent you an office address with answering service for as little as $75/month. This will not only give your corporation legal legitimacy, but it will give you a place to meet an occasional client

. Do not wait until you are sued or audited to "backdate" the paperwork! If you get caught (and you will), you'll find yourself in a legal mess that attorneys just drool over! An ounce of prevention is worth a pound of regret!

For complete "do-it-yourself" information for incorporating, order my complete home study course "How to Create a Bulletproof Corporation."

Comments

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[diana nakirigya]

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