Since the late Middle Ages, corporations have been the standard asset protection vehicle for business owners big and small.
The corporation permits investors to limit their liability: you can only lose what you contribute to the corporation.
Ordinarily, the personal assets of a shareholder of a corporation may not be reached to satisfy a judgment against a shareholder.
The primary exception to this rule is called Piercing the Corporate Veil, and it happens when you fail to respect the corporate form.
Respecting the Form
The most important aspect of incorporating a business is what happens after the business is incorporated.
In addition to filing the Articles of Incorporation, adopting the Bylaws, and applying for any necessary securities exemptions, the corporation must function on a day-to-day basis like a separate and distinct legal entity.
This means that annual shareholders’ meetings must take place in compliance with applicable State law. Appropriate minutes and other records of these meetings must be drafted to document major business decisions.
In addition, when money changes hands between the corporation and its shareholders, there must be a record of how and why it has done so. Money can be distributed out as salary, bonuses, benefits, dividends, ordinary income, etc. It can also be loaned by the corporation to a shareholder, but appropriate interest must be charged and the loan must be repaid. Using a business account to pay your rent or grocery bill is a big “no-no”; it may cause you to lose the protection of your corporation.
So, assuming you will always respect the corporate form, let’s examine the two most common types of corporations the “C Corporation” and the “S Corporation”.
Click here to read about the “C Corporation”
Click here to read about the “S Corporation”