So You Own Your Own Corporation … But Does it Work?

From the desk of Kristina R. Hess, San Diego Estate Planning (Wills and Living Trusts) and Business Attorney:

Most people know about the many advantages of owning your own corporation…the top three are:

  • There are significant tax advantages;
  • Corporations can provide asset protection;
  • Corporations can shield individual directors and officers from individual liability…

So, people go out and set up a corporation or have an attorney do it for them.  It is not that expensive to set up a corporation in California or Nevada or another jurisdiction.

But then comes the important part… Is the corporation a fiction or is it a legitimate business entity operating as a business?

And what exactly does that mean?

Here’s the deal, in order to get the benefits of a having a corporation (or LLC or other business entity) — the directors/officers or members must observe the corporate (business) entity formalities.  Our courts have decided that if it’s a real business and deserving of the many benefits of corporate status, then the corporate formalities will be observed.

That means you must hold annual director and shareholder meetings.  You must keep corporate minutes, issue stock, and meet to conduct corporate business.   You must do more than just file articles of incorporation.  You must maintain separate accounts and run your business as a business without comingling with your personal accounts/assets.  There is more, but these items are listed to give you a general idea of what is required.

It is difficult for an entrepreneur to comply with these technical regulations.

But if you do NOT, then, when the time comes for the corporation to work and provide the above asset and liability protections, it WON’T.

The legal technical term is called “piercing the corporate veil.”  Basically, what that means is that a court could disregard the corporate entity (piercing through the corporate veil) and the officers, directors, and shareholders would be held personally liable for the debts, obligations, and yes, liabilities of the corporation!  If you use the corporation to commit a fraud, the corporate veil could also be pierced.

Not a happy outcome!

It is for this reason that KR Hess Law offers a Family Wealth VIP Membership Program (Business Plan Level) to ensure that you are enjoying the full benefits of the corporate advantage by observing the corporate formalities and making sure all your ducks are in a row and lined up so your corporation will work when you need it to…

Personal Family Lawyer

Kristina Hess

San Diego, CA