Is Your Corporation at Risk? by Sherwood Guernsey, Esq.

Studies show that most small, closely held corporations would not withstand the challenge of a lawsuit or IRS audit. "Why not?" you may ask, "I thought a corporation would protect me from liability." A corporation will protect you from liability, but only if you follow the "corporate formalities."

Use the following as a checklist:

• Did you hold organizational meeting and appoint a board of directors?
  
• Did your board of directors appoint officers?
  
• Do you have written minutes of these meetings?
  
• Do you have a Federal Tax ID number?
  
• Did you physically issue the shares of stock?
  
• Does your corporation have its own bank account?
  
• Do you "commingle" your personal funds with your corporate funds (i.e., do you use the corporate checkbook to purchase personal items and vice-versa)?
  
• Does your corporation have a business license? A telephone in its own name? A physical office address with a written lease?
  
• Do you have annual meetings of the shareholders and board of directors? Do you have written minutes of these meetings?
  
• Do you sign all of your leases, contracts and letters in the capacity in which you are acting? (e.g., "President" or "Secretary")

Your failure to follow one or more of these formalities may result in a "piercing of the corporate veil." This is a legal expression for the process by which a court can actually penetrate the invisible wall of protection between you and your corporation and permit a creditor to go after you personally.

The lesson here is that if you want to be treated like a legitimate corporation, you have to operate like one. Go dust off that big, black corporate minute book you tossed in the closet years ago. Look through the forms. It's not rocket science; it's simply a matter of keeping records in case of a lawsuit or IRS audit. You don't need to run your corporation with rigidity; you simply need a paper trail to justify what you are doing.

Is a Corporation right for you?

Some people assume that if they want to protect themselves, personally, they must incorporate their business. However, today there are many different types of business entities available to business owners; a corporation may not serve your needs in the best possible way. S Corporation, C Corporation, sole

proprietorship, LLC, LLP - do you really know the differences? The protection of your business and your personal assets is no time to assume - find out the facts.

Sherwood Guernsey, has over 25 years of experience practicing law, with a focus on business transactions, real estate and estate planning. For business enterprises, he has a great deal of experience with initial business structuring, debt financing, venture capital, compensation planning, employment issues, contract negotiation and all other areas of business development. Mr. Guernsey is a cum laude graduate of Dartmouth College and received his J.D. from the Antioch School of Law in Washington, D.C.