The first step to a successful business is starting. Form an entity- whether a Limited Liability (“LLC”), S, or C Corporation each one provides a layer of protection for you. No one wants their personal assets (car, house, retirement, or bank account) to be available for other people to take. However, an LLC is frequently thought of as entirely different than a corporation. 

The first thing is, no matter which entity you have created a Corporate Binder. You can buy them on Amazon ( or Office Depot, or just grab a three-ring binder, some dividers and create your own. The Corporate Binder is not a magic tool to convince anyone that you do have a valid legal entity, but it’s a start. It’s a start because it should help you to remember that you do have a separate entity and hopefully also act as a reminder for you to fill in each tab of the binder. It creates a physical reminder for you to follow the formalities. 

Second, keep separate bank accounts. I know this seems silly when you are the only owner and the only one responsible, but keeping the accounts separate is the most significant way to show that your legal entity is separate from your personal being. Co-mingling (this is a term used a lot in law school, but is it a normal word? I’m not sure…) of funds or treatment of the work bank account as a personal one can allow a court to disregard your formation and make you personally liable. The reverse is also true; you do not want to be paying company expenses with your personal bank account. As much as possible, keep the accounts, payments, and expenses separate. 

Third, hold meetings. If you are an Inc. entity (S Corp. or C Corp.), you should be holding annual board meetings. These meetings do not need to be lengthy; in fact, most of these meetings do not need to be longer than 15/20 minutes. When I worked at a big firm managing various entities, part of my job was to put together a meeting agenda and make sure that the annual meetings occurred each year. Most corporate bylaws set notification requirements for annual meetings. If Notice of the annual meeting is not sent out within the specified time window, a waiver of that Notice also needs to be executed by the shareholders. The Agenda and Minutes from the meeting both need to be filed in the corporate binder as records that the entity was honored and observed. 

Fourth, follow the guidelines set up in the bylaws, articles of incorporation, and operating agreements. These documents set out specific procedures for large purchases and other procedural guidelines. When typing these “rules” out, it seems so silly. However, the problem is that people follow the legal advice at the beginning and form an entity. But then, they don’t consult attorneys during some day-to-day operations or contract negotiations. Make sure that when you are signing contracts, sign in your capacity to the organization. Do not forget that if you are endorsing something, it is on behalf of the company. Always include your title with your signature to indicate that you are not signing it individually. This is when they might not know or be aware of the requirements they initially agreed to in their formation documents. As much as having an entity is essential, so is knowing what is in your formation documents. Know what you agreed to so you can follow it. 

Fifth, but not least, do not forget that you have fiduciary duties to the company. Fiduciary duties mean that, as an officer or member of the organization, you cannot use the information gained in your official capacity for your personal gain. Failing to observe the fiduciary duties is what led people to be in trouble for insider trading. You know, those people who bought a lot of shares just before a merger is announced publicly? Or those individuals who see right before the quarterly profits are announced when they are so much lower than anticipated. Fiduciary duties include those of loyalty (no working for competing companies) and no taking an opportunity presented to the company and doing it individually. 

Mostly, all these formalities are in place to protect both you as the owner and those you work with. Although each state has its tests about “piercing the corporate veil” (the term used when you as the shareholder/member are held personally liable), Utah’s test for piercing the corporate veil is a pretty straightforward two-part test. The test is 1. Whether there is a unity of person and 2. Would it be fraudulent not to pierce the veil. All of these corporate formalities discussed will help make a court less likely to hold you personally liable and, therefore, are worth the extra time and attention. 

May 19, 2020

Corporate Formalities

Business, Limited Liability Company