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Keeping Up Appearances Corporate and Company Formalities
So you’re a newly established small business owner and you’re looking to make your mark and get your company off the ground? Well first of all, congratulations! This is an exciting first step and we here at Hannah Sheridan & Cochran, LLP wish you the best.
There are many benefits to organizing your business as a corporation or LLC, not the least of which being liability protection, increased credibility, and some structure for the business as it grows. It is important to remember though, that some of these benefits may be lost should the business fail to perform certain activities throughout the year (or, if the owners execute a personal guarantee for accounts). In particular, if the business does not maintain its appearance as an entity separate from the owners, the owners may become personally liable for the obligations of the business under a process called “piercing the corporate veil.” Here are a few ways to help prevent that from occurring:
All Corporations or LLCs should, in addition to formational documents filed with the Secretary of State, also maintain organizational documents. For corporations, this takes the form of their corporate bylaws, and for LLCs, an operating agreement. These documents set out the general rules for how the business is run, who may make decisions, how ownership is held or transferred, and any other details necessary for the operation of the business.
Further, once the business is properly organized as a corporation or LLC, it should begin acting under its name. When it advertises itself the business should do so under its formal name (unless using an assumed business name which you can read more about here). The business should sign contracts in its corporate name, rather than as individual owners or managers. The business should also issue invoices and make payments to or from the business only in the business name. And, critically, the business should ensure that its assets are stored separately from those of its owners. Any equipment or physical property should not be commingled with the owners’ property, and the business should maintain a separate bank account and credit card from which it can make payments. Those accounts should never be used to pay personal obligations of the owner(s).
In North Carolina, corporations are required to hold at least one annual shareholder meeting. The same is not true for LLCs, however, in the interest of keeping members informed of the company’s activities and keeping up appearances, it may be prudent to hold an annual members meeting regardless. While no particular format is required for these meetings, typically an officer is appointed to lead the meeting and address any necessary business. For each meeting, minutes should be taken and kept with the business’ records including summaries of discussions, presentations made, and other evidence of informed action by the shareholders or members as well as containing a copy of any materials distributed.
Annual Reports and Financial Statements
Finally, it is important that the business issue annual reports and financial statements for each year of operation. In North Carolina, annual reports must be filed with the Secretary of State including information such as the corporate name, the registered agent for the entity, and listing principal officers of the entity. Financial statements for corporations, on the other hand, should be delivered to shareholders within 120 days of the close of the corporation’s fiscal year, generally including a balance sheet, income statement, and statement of cash flows.
Although these details represent most of the regular obligations of a new business entity, others may apply such as corporation tax returns for S Corporations. If you have any questions about any of the above information, or have any other questions with regard to the formal management of corporations and LLCs, the lawyers at Hannah Sheridan & Cochran are here to help!