Corporate Formalities: Maintaining Liability Protection for Business Owners

Is your business organized as a Michigan Corporation?  One reason for forming your business as a Michigan Corporation was to take advantage of the liability protection afforded to that entity.  However, you must maintain several “corporate formalities” in order to maintain that liability protection. The consequence of losing the limited liability shield is that owners of the corporation may incur personal liability for corporate obligations.

Below is a list of several common pitfalls that corporate owners make, jeopardizing their limited liability shield:

Failing to sign in your official capacity. When signing contracts or other documents for the business make sure to sign in your corporate capacity (as director or officer).  The form for a corporate signature is usually the name of the business being listed before your signature and your name and title with the company listed afterwards. Otherwise, you may be signing in your individual capacity, and the agreement could be enforced against you personally.

Another area to think about is when the business is incurring debt. A lot of times banks will require one or more corporate owners to sign a personal guaranty for the debt. Many times this is not avoidable. But, it is important for you to be aware of the guaranty and to know the terms of your guaranty.

Failing to maintain annual minutes. Under Michigan law corporations are required to hold annual meetings of shareholders. The annual meeting requirement applies to all corporations, even very small corporations. Corporations are also allowed to satisfy the annual meeting requirement through written consent resolutions signed by all of the shareholders. Whichever method your corporation chooses, you should make sure you are documenting your annual meeting with minutes or sign a consent resolution each year.

Failing to use your official name. Many times, business owners fail to use their corporate name that is registered with the State of Michigan. If you do not use your corporate name or an assumed name that is filed with the State of Michigan (even just omitting “Inc.” or “Corp.” at the end) you are opening yourself up to personal liability.

Failing to keep adequate records. It is important to maintain good records for the business finances in order to distinguish your personal assets from the assets of the corporation.  If the company’s finances and yours as owner are not kept separate and distinct, creditors can seek recovery from the owners of the corporation.

If your business is organized as a Corporation it is important to maintain corporate formalities. It is a good idea to consult with an attorney if you are unsure if your Corporation is taking the proper steps to protect its owners from personal liability.