Legal Requirements for Maintaining Corporate Status
UPDATED: June 19, 2018
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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 structure as you go through the company's life cycle.
Attaining Corporate Status
Changing the business format 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 once the business starts generating more income or to get funding from outside sources or to protect assets. However, once you do incorporate, there are minimum standards for maintaining corporate status that must be followed. Failure to follow these standards will cause you to lose the liability protection that incorporation offers.
To obtain corporate status, you must file 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 this sustantial paperwork, you have created a C-corporation. The corporation will stay a C-Corporation unless and until you elect to be an S-corporation.
The Benefits of Corporate Status
Once you have secured corporate status, you have gained the primary benefit of LIMITED LIABILITY. This means that shareholders and officers are not personally responsible for the corporation’s debts or judgments against the corporation. This is the single most important reason people use the corporate form of doing business--to safeguard personal assets. (In contrast, sole proprietors and general partners in a partnership are personally liable for all debts and obligations of the business, such as loans, accounts payable, and defective products.)
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 individuals who own it remain completely separate entities for the purposes of liability. 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 rules 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 rules may include maintaining records, holding annual meetings, and maintaining all required filings with the state. It is also important that a shareholder never mix his or 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 corporate status and following corporate standards.