Important Corporate Formalities in Virginia for LLCs and Corporations.
The biggest advantage of forming a corporation or LLC is that you protect your personal assets. The Corporation acts as a shield protecting you and your family from personal liability. However, in order to have this protection, you must show that the Corporation is not a sham or your alter ego (your second self). The Corporation is to be treated as if it were an entirely separate individual and party from you. Throughout this article I will be using the term corporate or corporation to describe the rules which largely apply to the various forms of corporations and limited liability companies in Virginia.
Corporate Formality No-No #1: Commingling of funds
Commingling of funds can take many forms. These are just but a few examples of how commingling could create problems. For starters, every corporation or LLC must have an individual and separate operating bank account. The bank account should be titled in the name of the Corporation. Corporate funds should only be used in furtherance (for the benefit) of the Corporation.
If I am suing your Corporation in Virginia, I am most likely going to ask for your bank records in discovery. If I see that you are treating corporate funds as your own personal piggy bank, that potentially creates an argument that you should be named *personally* as a defendant to the action.
Corporate Formality No-No #2: Not clearly notifying the public (customers) that you are a corporation (separate entity).
Each and every contract you have should show that your customer is doing business with the Corporation and not you personally. You need to make it clear that you were merely an agent of the Corporation. All of your contracts should have the appropriate corporate signature lines.
As an example, I had a case not too long ago and which my client hired a company to do some work for them. The contractor asked that all checks be made out to him personally and not the Corporation. This created an argument that my client was doing business with him and not his Corporation. While we were ultimately able to settle the case, it created a sufficient headache for the contractor personally. I cannot guarantee that we would have ultimately won that argument, but that contractor opened the door for a suit against himself personally.
Corporate Formality No-No #3: Sloppy bookkeeping
This is particularly true when you have a dissolution of a corporation or LLC and the partners are trying to track down where assets of the corporation have been placed. All too often, I have seen former business partners who keeps sloppy records. Not only does it lead to increased litigation, it could lead to someone walking away with more money than they are entitled to. At all times, we must account for the corporate funds and keep those assets separate from your own personal finances. I cannot stress this enough!
Corporate Formality No-No #4: Failure to adopt corporate rules.
This rule is more important when you have multiple members in an LLC or you have a stock corporation. Limited liability companies should have an operating agreement that discusses the relationships between the parties and what happens if there is a dispute. Corporations must have bylaws which are extremely more detailed than your typical operating agreement for a limited liability company. Corporate bylaws should expressly deal with meetings, elections, stock transfers, officers, directors…. The biggest problem that I have seen consistently is where business owners do not follow the express rules of their bylaws or operating agreement. They also might decide to change their governing agreements but they never put those amendments down into writing. You need to be meticulous in this area. If you hold an annual meeting, which you should, you need to keep detailed notes of what was discussed at that meeting. If you have a vote or resolution, that must also be reduced to writing and signed by the directors. Keep a corporate binder that includes all of the information for the Corporation.
There are other Corporate Formalities. You must remain diligent!
This list is by no means complete. Is not my intention to scare you away from forming an LLC or a corporation. Rather, I want you to always keep in mind that the Corporation or LLC is separate and apart from you. If it appears that you are ignoring the corporate formalities, you are placing your own personal assets in jeopardy. While you may ultimately prevail in the claim against you personally, it is not worth it to go there. It is better to spend the extra expense and time of meticulously separating yourself from the Corporation so that your family’s personal assets are protected.
Ryan C. Young | Corporation Law | Business Attorney | Richmond, Virginia