Your Corporation Limit Your Personal Liability?
Nine Suggestions for Taking Your Corporation Seriously So That Others Will, Too
(Copyright 1998, Julie I. Fershtman, Attorney at Law and reprinted with permission)
By Julie I.
Fershtman, Attorney at Law
and Author of "Equine Law & Horse Sense"
Who needs a corporation? Possibly, you. The corporation's main benefit is that it can serve as a liability shield -- that is, individuals running the corporation are typically immunized from personal liability for liabilities arising out of the corporation's activities. This can be especially desirable if your equine business faces the risk of a lawsuit that could exceed even the highest liability insurance limits. The corporation is also desirable if you seek to protect your personal assets from obligations or debts of the corporation.
Would it surprise you to learn that a court, in an appropriate case, could disregard the corporation as if it never existed? This can, and does, happen when corporations ignore important formalities.
Simply put, if you fail to treat your corporation like a corporation neither will others. Someone who claims the corporation was merely a sham and not run as a true corporation may try to bring legal proceedings to hold certain of its proprietors personally liable. These efforts are called "piercing the corporate veil." By seeking good professional advice and following the 9 suggestions below, you will help prevent these challenges from happening, or, if they do, you will help your corporation emerge victorious.
1. Get a Federal Employer Identification Number. Every corporation needs a Federal Employer Identification Number ("FEIN") before doing business. This is comparable to your Social Security number. The FEIN is required before opening a bank account, filing a corporate tax return, sending business invoices, and, of course, hiring employees. The IRS, after you submit a simple application form by mail or fax, will issue the FEIN to your corporation. Check your local phone book for the number of the nearest IRS Service Center.
2. Do Separate Banking for the Corporation. Since your corporation has an existence separate from your own, any money passing through the corporation, whether it be a boarding stable's payments to the feed store or a riding instructor's lesson income, needs to be paid by or deposited into the corporate bank accounts -- not your own personal accounts. Of course, any money the corporation may pay you directly would be the obvious exception.
Also, when the corporation lends money to someone, be sure to evidence the transaction in a carefully worded contract. One type of contract is a Promissory Note. The document would reflect the amount of the loan, who is receiving the money and who is obligated to pay the loan back, payment due date(s), interest rate (if any), and that the corporation is the lender.
3. Keep the Business Reasonably Well Funded (Capitalized). Proper maintenance of a corporation requires keeping the corporation's bank accounts funded with reasonably sufficient funds to meet expected debts. This does not mean that the corporation's bank account must have a huge stockpile of money. Rather, this means, for example, that the operations of a riding instructor who pays at least $500 a month to lease an equine facility would be suspicious if he or she only maintained a constant bank balance of $100.
4. Operate the Business Under the Corporate Name. What if your corporation does business under another name? The other name is called a "fictitious" or "assumed" name. Before using such a name, make sure that you have first submitted a proper filing in the state of the incorporation letting the state know that the corporation is running the business under a fictitious name that differs from the corporation's name. Consequently, if your corporation is "XYZ, Inc.," and if the state has approved your papers formally requesting to transact business under the assumed name of "Morningstar Farms," you can use either name in your business operations.
5. File Annual Reports With The State. Virtually all states require corporations and some other entities (such as Limited Liability Companies) to file annual reports with the Secretary of State as a condition to maintaining their corporate status. Each state gives a special form for the report and sets a deadline for the corporation to return it, together with a small filing fee. Annual reports generally include (1) names and addresses of corporate officers and directors; and (2) the name and address of the corporation's Registered Agent (a Registered Agent is the one designated to receive communications and lawsuit papers on behalf of the corporation). In addition, some states require the corporation to file, along with the annual report, a balance sheet (which is essentially a summary of the corporation's assets and liabilities) and to state the number of corporate shares issued to shareholders.
Busy equine businesses cannot afford to miss the annual report filing requirement. In fact, under the laws of most states, corporations who neglect to file their annual reports over a designated period of time risk having their corporate authority revoked entirely.
6. Keep Corporate Minutes and Records. The laws of every state require corporations to maintain records of important corporate activities. Simply put, you will be required to keep a written record of significant transactions that include, at a minimum, bank loan documents, minutes of shareholder meetings, elections of corporate officers and directors, and officers and directors names and addresses. These records are considered internal documents, and states typically do not require that they be filed with the state. Keep these records in a handy location, such as a binder or folder, and maintain them for as long as the corporation stays in existence.
7.Sign Contracts Properly. Do people with whom the corporation does business know that they are dealing with a corporation and not an individual? If your business contracts, such as sales and boarding contracts, nowhere mention the corporation, you might trigger someone's attempt to impose personal liability. Corporate contracts should name the corporation and identify the status of the one signing the contract on behalf of the corporation. For example:
John Doe, President
8. Stay Adequately Insured. As this author has written in past articles and in her book Equine Law & Horse Sense, equine businesses who assume that they are protected by a business owner's basic homeowner's insurance policy could be making a very costly mistake. For example, if someone is hurt while engaging in a business activity -- a riding lesson you give someone in exchange for money or your horse boarding business, as examples -- the standard homeowner's insurance policy will likely not protect you in the event that a claim or suit is filed. Why? These policies usually exclude coverage for claims arising from a "business pursuit" of the one insured. It typically takes a policy of "commercial general liability" insurance to protect a business in this setting. When buying business-related insurance, make sure to name the corporation as an insured party. Also, consider including yourself and others affiliated with you as "additional insured" on the policy; discuss this with your insurance agent or lawyer.
9. Get a Business License (If Required by Law). Some states, such as Michigan, require stables to be licensed. If your state has licensing requirements, make sure that the corporation's name appears on the license.
Conclusion: In conclusion, please keep these concepts in mind:
1. Consider keeping a calendar with flagged reminders so that you will not miss important corporate filing deadlines set by the state.
2. Organize your corporate minutes and records in a folder or binder, and keep them for as long as the corporation exists.
3. Remember that the corporation is not legally official until the state has accepted your corporate filings and you have paid required filing fees. Before establishing a corporate name or assumed name, contact the state to determine whether another corporation has already reserved the right to do business under that name.
This article does not constitute legal advice. When questions arise based on specific situations, direct them to a knowledgeable attorney.
About the Author
Julie I. Fershtman is an attorney serving the horse industry for several years. She is rated "AV" [highest rating] in the Martindale Hubbell Law Directory, and her biography is published in Who's Who in American Law. She can be reached at (248) 644-8645.
Ms. Fershtman is the author of Equine Law & Horse Sense, the nationally-acclaimed book, which sells for $17.95 +$3 shipping and handling (Michigan residents add 6% sales tax). Contact Horses & The Law Publishing at (800) 662-2210 or send check or money order to Horses & The Law Publishing, P. O. Box 250696 Franklin, MI 48025-0696.
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