How can you protect a family business with corporate formalities?
Family businesses are often run more like a family affair than like a business. They often don’t have a board of directors, corporate by-laws, shareholder’s or director’s meetings, or corporate resolutions.
While this informality is both understandable and common, it also poses a grave hidden danger to the business itself.
In the absence of corporate formalities, family businesses could lose the insulation that the corporate veil offers.
The corporate veil shields owner’s personal assets from business liabilities. If the corporate veil is not in place if the business goes bankrupt, has debts, or loses a litigation, creditors can obtain satisfaction through both the business’ assets and the owner’s personal assets, e.g., house, car, personal bank account or investments.
To maintain the corporate veil, family businesses must:
Have a properly formed and authorized entity, e.g., authorized to do business in all jurisdictions where it is located
Adequately capitalize the entity
In all business dealings use the full entity name or obtain DBA’s
Issue stock certificates
Draft and sign by-laws
Conduct shareholders’ and directors’ meetings
Draft and sign resolutions/consents
Use titles when signing business documents
Use arms-length documents for all transactions
Segregate personal and business finances
By taking these steps, outsiders will have a much more difficult time attacking the formal nature of the family business. That, in turn, will protect the family, itself.
For more information about this article or other issues, please contact us The Bachman Law Firm PLLC at email@example.com or 845-639-3210.