Failure to Keep it Formal – The Unintended Consequences of a Casual Corporation

Sanders Law Firm, PLLC – Randy W. Ivie, Attorney

I recently heard a young man state that what he liked most about his job was the casual atmosphere of the workplace. Apparently, this company had extended casual Fridays to include the entire workweek. In addition to the relaxed dress code, the company also provided a great deal of flexibility in terms of schedule and allowed employees to work from home when possible. Sounds like good work if you can get it. There is a limit, however, as to how casual a company should be in terms of keeping and maintaining its business records.

One of the major benefits of forming a corporation is that investors are not exposed to any greater risk than what they have invested in the company. If the company assets cannot cover the liabilities, creditors and those who have obtained judgments against the company are just out of luck. However, the protections that are provided by this type of business organization require that the company observe what are called corporate formalities. Failure to do so may open up the investors, officers, and even directors to personal liability for anything the corporation cannot cover.

For example, failure to maintain corporate formalities may be used to show that that corporation was not an independent entity but merely an alter ego of the sole or dominant shareholder to shield that person from liability for his actions. Where the court finds those actions be in violation of public policy, state law or some positive legal duty, or fraudulent, dishonest or unjust, it likely will treat the corporation and the shareholder as one in the same person and hold the shareholder liable.

Failure to timely file annual reports or pay taxes can result is the state administratively dissolving the corporation. A debt incurred by a corporate officer after dissolution of the corporation may make that officer personally liable for the debt.

Failure to maintain corporate formalities may be used to show that directors breached their fiduciary duties to the corporation by making unsound decisions that should have been known except for the lack of relevant information that otherwise would have been available in corporate records.

If failure to maintain corporate formalities results in administrative dissolution, the corporation no longer exists as a legal entity and is no longer able to enter binding contracts. Once a vender or supplier discovers that the entity no longer exists, it likely will refuse to conduct any further business with the company for fear of default.

For all these reasons and more it is important for a corporation to keep it formal where it matters. At Sanders Law Firm, PLLC, we know what makes for a healthy corporation. We can help you form a corporation, bring your corporate records up to date, deal with administrative dissolutions, draft bylaws, shareholder agreements, stock transfer agreements and other important contracts, issue stock certificates, and help you conduct annual meetings. We are here to help make sure that you don’t suffer unintended consequences, no matter what you wear on Fridays or any other day of the week.