by Bruce L. Dorner
I often hear the cry, “I’m incorporated so they can’t sue me…can they?” In today’s do-it-yourself society it has become easy to prepare and file incorporation documents with the New Hampshire Secretary of State. However, do you really know what you are doing? Is this an area in which you have competence?
Forming a corporation requires the filing of a few documents with the State. However, the contents of those documents have great significance as to creating and maintaining protection from law suits and other liabilities.
When an attorney brings a law suit against a small business corporation, the focus is often to find a way to get behind the corporation and hold the individual owners responsible for the claim. This is called “piercing the corporate veil.” Often it is very easy for a competent attorney to achieve this goal against a home-brew corporation.
Here are a few ways attorneys may reach beyond your corporate pocket book and get directly into your personal assets and accounts. After you filed the initial documents with the State, did you conduct an organizational meeting for the shareholders and did you elect directors and officers? Did you issue shares of stock and record the minutes of the meetings in proper form? Did you obtain a proper tax identification number and open proper business accounts? Miss any of these items and you may have personal exposure!
One of the great myths of corporate documentation is the belief that filing the annual report with the Secretary of State is sufficient to keep your corporation in good standing with the State. There is an entire chapter of laws which set out a healthy list of requirements, including the requirement to hold an annual meeting and to elect officers and directors and to keep minutes of all meetings. Failure to comply with the requirements of the Business Corporation laws may expose you to personal liability for sins of the corporation.
Another way Mom & Pop corporations are at risk is the failure to understand that the corporation is a separate person for all legal purposes. When a customer calls to complain Pop says, “don’t worry, I’ll take care of it!” Well, Pop just made a personal promise and he is personally on the hook. Had he said, “don’t worry, we’re a reputable business and our representative will be there in the morning to fix the problem,” he’d be safe. The same applies when ordering materials or supplies. Do you sign your name, or do you sign in a representative capacity such as President or Treasurer? If you don’t have a commercial credit account in the name of the business and sign as a representative of the company, then you’re personally on the hook.
A new alternative to incorporation is the formation of a Limited Liability Company (LLC). This new business entity may help to reduce some of the need for corporate formality and to provide some reasonable liability protection. Instead of corporate officers and directors, the LLC calls the key players “members” and “managers.” These are the people who own and run the business. The structure may be less formal than a corporation, but a detailed written Operating Agreement of the members is still required, as are registrations with the State of New Hampshire.
Before you think you have it all under control, it may be worthwhile to work with both an attorney and an accountant. I can’t over emphasize the need for an accountant. After all, the United States Internal Revenue Service also wants a share of your business income!