February 22, 2017
If you own a small business, you are probably aware that one of the advantages of operating your business as a corporation or a limited liability company (LLC) is the ability to shield your personal assets from business creditors. However, many business owners do not realize that there are a number of steps that should be taken to maintain this liability protection. Among these steps are “corporate formalities.” You should be aware of these formalities because, as a business owner, you are responsible for ensuring compliance. In fact, you can be at risk for losing this personal liability protection if you, among other things, fail to observe the required corporate formalities. In a lawsuit, a plaintiff can attempt to “pierce the corporate veil” to reach your personal assets.
The Indiana Supreme Court has laid certain factors for Courts to consider in determining whether a plaintiff has met its burden to pierce the corporate veil: (1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation shareholders or directors; (4) use of the corporation to promote fraud, injustice, or illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of assets and affairs; (7) failure to observe required corporate formalities; or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form. Aronson v. Price, 644 N.E.2d 864, 867 (Ind.1994).
In Indiana, corporations are governed by the Indiana Business Corporation Law (“IBCL”) and LLCs are governed by the Indiana Business Flexibility Act (“IBFA”). The IBCL actually requires shareholder and directors to hold annual meetings while the IBFA is more relaxed in its corporate requirements. However, whether your company is a corporation or a LLC, the Courts apply the above factors in determining whether a plaintiff is able to pierce the corporate veil. Therefore, holding an annual company meeting is not only good practice but important for maintaining corporate records and observing corporate formalities.
What is an annual company meeting? A company meeting is an opportunity for the shareholders or members for a LLC to discuss a variety of topics including the operations of the company, goals and budgets, and the appointment of directors and officers.
How to plan a company meeting? First, each shareholder or member must receive written notice that the meeting is taking place. Prepare an agenda and include it with the written notice. You might also want to include a copy of the minutes from the last meeting, along with an update on the company’s progress, including financial statements. If shareholders or members are able to review this paperwork ahead of time, they can come prepared to ask questions and provide important feedback.
Indiana law allows annual and regular meetings to be held inside or outside of Indiana at a place stated in the company bylaws. If a place is not stated or fixed in the bylaws, annual and regular meetings are to be held at the company’s principal office. Alternatively, these meetings may be held by means of remote communication, such as Skype, if provided for in the bylaws.
Minutes of company meetings should also be kept. Under the IBCL, corporations are legally required to keep a written record of the meeting. Minutes content typically includes: time and place of the meeting, attendance and chair of the meeting, any actions taken, and the signature of the recorder and date. Keeping these minutes, even if you’re a sole owner of your company, can help you stand up in court and protect your limited liability shield if needed.
There are a number of other corporate formalities and additional steps that should be taken in order to shield corporate members from personal liability. An attorney can help guide you through this process and handle much of the procedural work.
This article is not legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author and attorney, Carla V. Garino, or attorney William Webster, with Webster Legal LLC, located in Westfield Indiana. Ms. Garino and Mr. Webster can be reached at (317) 565-1818 or at [email protected] or [email protected].