Corporate status, or a corporation business structure, may be the right choice for a business you intend to start, but establishing and maintaining corporate status may involve some careful decision making on your part. If you have already started a business, you may change its legal entity in order to gain corporate status if you wish.
Changing a business entity is common once business owners have established a successful, growing enterprise. Owners who start out with partnerships may want to incorporate into an S corporation or a C corporation when their business has grown out of the partnership structure. Incorporation can be a beneficial move for new or already-established business owners, and obtaining corporate status can protect your assets considerably. However, once you do incorporate, there are minimum standards for maintaining corporate status; and it is extremely important to maintain this status as failure to do so will cause you to lose the liability protection that incorporation offers.
To obtain corporate status you must file the articles of corporation, your stock divisions between shareholders and owners, and the corporate bylaws with your state. You will also need to notarize and sign all documents required by your state, and obtain an employer identification number if you don’t already have one. Once you have completed these steps, you have created a C corporation. The corporation will stay a C corporation unless and until you elect to be an S corporation.
Once you have attained corporate status, you have gained the benefit of protected personal liability. This means that shareholders and officers are not personally responsible for the corporation’s debts or judgments made against the corporation. The protection of corporate status is not limitless, however, and if someone who is suing you “pierces the corporate veil,” then you could be held personally liable for a judgment against you. Ensuring that you keep your corporate status is relatively easy, as long as you follow the rules of the corporation.
Each state has its own laws governing the actions that can pierce the corporate veil. As long as the corporate veil remains intact, the corporation and the individual remain completely separate entities. If a court finds that the actions and interests of the corporation and its officers are so united that they cannot be distinguished, then the benefit of the corporate veil will be lost. Generally, if the officers of the corporation follow the formalities of the corporation, act in good faith, avoid wrongful acts, and act within the scope of their duties in the corporation, then the corporate veil will remain in place. Corporate formalities may include maintaining records, holding annual meetings, and maintaining all required filings with the state. It is also important that a shareholder never comingle her personal assets with the corporate assets. Courts will often determine that the corporate veil has been pierced when the corporation’s officers or directors engage in criminal activity, or it is determined that the corporation was set up with the intent to defraud. Courts will also look to see how much the corporate officers are using the corporation to advance their personal interests.
Questions about maintaining your corporate status in your particular situation can be best answered by a corporate lawyer. Your state’s Secretary of State website is also a good place to find information about maintaining your corporate status and following corporate formalities.