If you do not timely file annual registrations, you run the risk that the Secretary of State may administratively dissolve your entity.  More importantly, if you do not follow proper corporate formalities, such as holding annual meetings, keeping accurate minutes and updating other corporate records, you subject your personal assets to potential liability through corporate veil piercing.  The veil of a company’s separate existence is pierced and the owners exposed to personal liability when a court determines a debt is not really a debt of the company, but ought, in fairness, to be viewed as a debt of the owner.  While there are many factors for piercing the corporate veil, failure to follow corporate formalities is a typical factor.

Annual corporate maintenance is certainly something you can do on your own, if you like.  Alternatively, you can engage your corporate attorney to assist.  It should not cost a fortune — in fact, I typically offer a flat fee annual maintenance package.  Whether you do it yourself or engage an attorney, I suggest you spend a few minutes thinking about annual corporate maintenance before the year ends.  It is also a good opportunity to do a general check-in with your corporate counsel on other business and legal matters.  You will then be ready to ring in the new year!

First, a definition.  Piercing the corporate veil is generally a situation where a shareholder or director of a corporation is held liable for the debts or liabilities of the corporation despite the general principle that shareholders are immune from suits that otherwise would hold only the corporation liable.  Once the corporate veil is pierced and the separate corporate entity is disregarded, the shareholders and directors can face personal liability for obligations of the corporation.

Although the laws are different in each state, generally for the corporate veil to be pierced, there must be evidence that shows the corporation was merely a formality and that the corporation neglected corporate formalities and protocols. Here are some factors that are reviewed when deciding whether corporate formalities have been neglected:

• Absence or inaccuracy of corporate records.
• Non-arm’s length relationships with related parties.
• Failure to observe corporate formalities (such as documentation requirements, board and shareholder meetings, or accounting practices).
• Failure to observe legal formalities (such as annual registrations, payment of annual fees or filing tax returns).
• Intermingling assets of the corporation and the shareholder.
• Illusory corporate officers and/or directors.
• Significant under-capitalization of the business.
• Withdrawing corporate funds by the dominant shareholder.
• Treatment by a shareholder of the assets of corporation as his/her own.
• The use of the corporation as an “alter ego” of a shareholder.

While this is not an exhaustive list of factors a court will look at when deciding whether to pierce the veil of a corporation, and not all of these factors need to be present to pierce the veil, they do give a flavor of the types of activities that should be avoided.

Whether the corporation is large or small, following corporate formalities is extremely important to preserve the liability shield offered by a corporation.  Investing early in the life of a corporation to ensure you have processes and procedures in place for handling routine corporate formalities can payoff significantly over the long term.  So, spend a few minutes in the next week looking at your corporation and determine whether you believe you have risk factors for piercing the corporate veil.  Then, contact an attorney that specialized in corporate law to instruct you on how to properly run your corporation to mitigate any possible risk of piercing the corporate veil.