There are certain moments at the start of an entrepreneur’s journey that signify a new business idea is indeed about to take shape. One of these happy occasions is the receipt of a handsome, leather-bound binder that contains dozens of newly printed corporate share certificates.
Corporations are a form of business organization that can be set up by one person or a group of people. There are different types of corporations including professional corporations, standard or “C corporations” and “S corporations” – each with varying administrative requirements and benefits for their founders and shareholders.
Why incorporate a business?
A primary benefit of incorporating is to shield founders and corporate officers’ personal assets (homes, cars, savings accounts, etc.) from potential unpaid business debts, product or service liability litigation and other costly business calamities.
This nifty protection, called the “corporate veil,” is especially important to older, second-career entrepreneurs who tend to have more personal assets than younger entrepreneurs.
But here is the catch: The corporate veil is effective only if the corporation remains in “good standing” by meeting all of its corporate and administrative duties. When cranky banks, landlords, plaintiff attorneys, equipment leasing companies and suppliers are determined to find a way to collect unpaid business bills from the founders, they try to build a case that the corporation’s good standing was somehow compromised.
One of the easiest ways determined debtors can “pierce the corporate veil” of liability protection is by proving that the corporation was not run as a separate entity from the founding entrepreneur or corporate officers.
6 action steps to help you keep your corporation in good standing and safeguard your personal assets
Document loans and advances. It’s never wise to pay any corporate bill directly from a personal checking account. If you have to use personal funds to fund your company’s business operations, write the personal check to the corporation first and then immediately document the sum as a loan advance or new equity investment in the corporation. Equally, don’t abuse corporate expense accounts or borrow funds from a corporation without signing a loan document.
Keep it separate. Get a separate business credit card to manage business travel and other expenses. The credit card doesn’t have to be a so-called “professional” credit card with your company name on its face, just a separate credit card account.
Add your official title. Vendors and collection agents like to claim that they were misled by small business owners. They say they thought they were providing a product or service to a person rather than a corporation. To avoid confusion, write your corporate title and corporate name next to all documents that require your signature such as contracts, leases and business letters. For example, I am Susan Schreter, CEO of Start on Purpose Corporation. When I add my title to correspondence, I represent that I am signing in an official capacity as an officer of the corporation.
Correct billing errors. All debts, invoices, tax obligations and other business liabilities should be addressed to the corporation, not the individual name of the business founder or CEO. Ask creditors to correct invoices before payment.
Do what you said you would do. At the time of incorporation, entrepreneurs outline certain administration obligations in the corporation’s charter and bylaws. If, for example, your incorporation documents state that the corporation will always have three to five board members, then maintain a board with three to five board members.
Keep current. Some states are more punitive than others with regard to incomplete documentation and tardy filings. Another requirement to help keep a corporation in good standing is to consistently advise the governing state of incorporation of any changes to the corporation’s business address, names of officers or directors, capitalization, articles of incorporation or bylaws.
Creating a corporate entity is only the beginning of your new career as a business owner. When you do it right from the start, you will save your company extra time and expense correcting surprise problems later.