10 Most Common Mistakes Of Small Closely Held Corporate Owners

There are over 80 reasons the courts can pierce the corporate veil. The following list was compiled as the most common reasons the courts look to disregard the liability protection your entity provides.  

  1. Domination of the corporation by one shareholder
  2. Failure to maintain corporate records
  3. Failure to keep corporate financial records
  4. Separation of personal and business assets
  5. Under capitalization
  6. Failure to keep the corporation in good standing
  7. Failure to sign documents in the corporate fashion
  8. Failure to identify the business as a corporation
  9. Failure to operate related corporations autonomously
  10. The disregard of legal formalities and the failure to maintain arm’s legnths relationships among related entities.

1. Domination of the corporation by one shareholder

Many small businesses are dominated by one shareholder, and it is especially important for such businesses to keep up all other formal aspects of maintaining a separate corporation. This issue alone will not lead to a piercing of the corporation, but domination of the corporation, along with other factors included in this list can create a total picture justifying a piercing of the corporate veil.

Because of this background a sole shareholder must be more cautious about respecting the separate identity of the corporation.

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2. Failure to maintain corporate records

Many of the reported cases involve the failure of the corporation to have even one meeting. This seems like an extreme situation, yet we regularly see corporate record books without minutes. Lack of minutes could put you at risk in the event you are sued as a shareholder. The Compass Group was designed to eliminate this possibility. The programs offered will complete and maintain your corporate status.

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3. Failure to keep corporate financial records

If the separate status of the corporation cannot be established through normal accounting records and financial statements shareholders are in big trouble. The reported cases do not discuss the status of financial records, but this issue goes to the heart of maintaining a seperate entity. We cannot imagine a corporation failing to maintain separate financial records and surviving a challenge to the corporate status.

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4. Separation of personal and business assets

A sole proprietor can grab some cash from the till and use it to buy groceries on the way home because the business and the proprietor are the same.  Not so with a corporation.  The same holds true with company assets. As a shareholder you don’t have the rights to utilize the company assets outside the scope of business.

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5. Under capitalization

A corporation must be capitalized with enough capital to give it a fair and reasonable chance of success.  If not, then it doesn’t appear to be real.  Unfortunately, there is no benchmark for how much is enough.  Obviously, different businesses require differing amounts of capital to give them a reasonable chance of success.  In your planning you must give this issue careful consideration.

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6. Failure to keep the corporation in good standing

Imagine that you are on the witness stand in a court case in which piercing your corporate veil is at issue, and you are maintaining what a great and viable corporation you own, when the plaintiff’s attorney tells you that your corporation has been revoked by your state for failing to pay its annual fee. What are you going to say?  You can avoid this disaster by simply using the services provided by The Compass Group. We will remind you and keep you updated on state filings. Not sure if your company is current at the state? Call 1-877-834-8211 today and we will check your status.

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7. Failure to sign documents in the corporate fashion

As we have discussed earlier this can be a major error.  It can be avoided by signing in the manner indicated below:

AJAX CORPORATION

By: ____________________
President

In this instance the person signing the document is clearly and obviously signing on behalf of the corporation, and not on his or her own behalf.  No opponent can expect to assert that they thought the contract was with the individual, or that the individual misrepresented the nature of his or her involvement.  It is clearly a corporate signature.

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8. Failure to identify the business as a corporation

It’s important that people know you are doing business as a corporation and not as an individual; especially if they are going to be extending credit. If you wait until you are involved in litigation with this party they are likely to devour you in court.  If you want to provide a personal guarantee, that’s fine, but do it from the beginning to avoid more problems than you ever imagined.

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9. Failure to operate related corporations autonomously

If you have more than one corporation, be sure to operate them one at a time.  Each one should have its own meetings, its own records, its own bank accounts and so on.  It’s fine if you are a player in all of them, as long as they are operated separately.

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10. The disregard of legal formalities and the failure to maintain arm’s legnths relationships among related entities.

The mistake some business owners make is to run multiple businesses from one entity. While this is not the sole reason your corporate veil can be pierced it does tend to lead to a lot of commingling of assets, financed and personnel. This does not allow for “arm’s lengths transactions.” It would be a wise idea to form another entity to run your other business through. Not only does this prevent co-mingling but it also establishes another level of protection from liability.

Wondering about your corporate health? Take our Corporate Health Checklist test or contact us today to get a full review from one of our corporate coach specialists.

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DISCLAIMER: Compass Group and its employees or agents are not in the business of providing tax or legal advice. If legal advice or other expert assistance is required, the services of a person in those professions should be sought. Compass Group, its employees and agents do not make any factual determination as to the validity of any business deduction for tax purposes. Compass Group does not expressly or impliedly endorse, accept, or validate any business record produced by Compass Group on behalf of Client. The Completed Documents produced by Compass Group through this written request are based solely upon the information provided by the client.