A recent Illinois Appellate Court case has highlighted the importance of following the formalities of a corporation to avoid “piercing the corporate veil.” One of the main reasons to organize a corporation is to limit liability arising from doing business to only the corporate assets. However, a creditor who is not fully paid from corporate assets will frequently attempt to attach the personal assets of shareholders. A creditor will convince a court to “pierce the corporate veil” because the shareholders have not followed the formalities of being a corporation. On repeated occasions, Illinois Appellate courts have pierced the corporate veil of corporations that did not follow record keeping formalities and formalities in the way it did business. To avoid this possibly happening to you, consider the following.
You must hold your business out to customers and the public that you are in fact a corporation. The exact corporate name, as is on file with the Secretary of State, should appear on all documents including telephone listings, advertisements, business cards, letterheads, envelopes, signs etc…. All letters and documents should be executed using your title as an officer of the corporation. The financial affairs of the corporation must be separate from personal finances. The corporation must issue stock to shareholders. Minutes of shareholder and director actions must be recorded at least annually. The minutes can be in the form of action by written consent without a formal meeting. Annually in the minutes shareholders elect directors and directors elect officers. While some of this may seem clerical it can become critically important to protecting your personal assets should you be a defendant in a lawsuit.
Doctors practicing in the corporate form probably know that the corporation will not shield personal assets from malpractice claims asserted against them for personal malpractice. However, the corporate form will shield personal assets from malpractice claims brought against another shareholder of your practice. Additionally, nonmalpractice type of claims are limited to the corporate assets.
Notwithstanding following all the formalities, failure to pay employment or sales taxes can result in personal liability no matter how well the corporate records are kept.
In addition to the above, it may be time to review your estate plan to consider some further forms of asset protection for yourself and your family. Please feel free to call us at anytime.