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How to Maintain Corporations and LLCs

Insight Michael Moradzadeh Michael Moradzadeh · March 19, 2010

Forming an LLC or a corporation is an important first step to achieving tax benefits and protection from liability.  In order to preserve these important benefits, however,  it is very important that your company is maintained properly. Otherwise, you run the risk that the separate nature of your company will be ignored by the IRS or a court of law.   While there is no substitution for the sound advice of experienced counsel, a few simple steps will help ensure that you reap the benefits of your LLC or corporation for as long as they exist. The minimum requirements for maintaining corporations and LLCs is that they must:  1) maintain adequate capitalization; 2) keep clean financial and legal records; and 3) be treated as separate and distinct from its owners.

Maintaining Adequate Capitalization

Maintaining adequate capitalization means that the company must be financially prepared to cover the risks it is taking.  If a company is a high-risk company that has high potential of being sued (for example, a hospital) then it is required to have enough money in its bank account to cover such an eventuality.  The existence of insurance is an important consideration, since a company that is insured can cover its capitalization requirement by having enough liquid assets to cover the insurance deductible if and when a claim is brought against it.

Keep Clean Financial and Legal Records

Keeping financial and legal records of a corporation or a limited liability company starts from the day it is formed.  The charter (Articles of Incorporation or Formation), the bylaws/operating agreement, and the organizational consents must be carefully drafted and understood by the owners, managers and directors of the company.  They must then be adequately signed and preserved in a corporate binder.  Then, for the entire lifespan of the company, the rules of these documents must be adhered to.  Such rules may include annual shareholder meetings with corresponding minutes and resolutions by the board of directors or shareholders whenever necessary.  As a rule of thumb, whenever the company makes an important decision, it is prudent to make sure it is authorized by the appropriate parties, and properly documented.

Further, corporations and LLCs are legally required to keep and maintain clean financial records of the business, monitoring every dollar that comes in and out.  These formalities are often ignored by smaller companies where the shareholder(s), manager(s) and the director(s) are often the same people.  However, it is crucial that these formalities be observed. Otherwise the IRS or a court of law might find the company to be a mere shell and ignore it at the precise moment you wish to rely upon its liability or tax protections.  This is why both an accountant and a lawyer are important to maintaining a corporation or an LLC.

Keep Your Company Separate from its Owners

If your company maintains clean financial and legal records, you have mostly accomplished the last requirement of keeping your company separate from its owners .  However, you must also take careful measure to ensure that the owners do not mix their funds with those of the company. The owners’ personal expenses and the company’s expenses must be kept separate and distinct.  Further, the owners, managers and directors of the company must sign all of the company’s legal documents as representatives of the company and not in their individual capacities (i.e. as president of the company and not just by the individual personally).  Similarly any personal legal documents should not bear the name of the company.  If there is any confusion as to how an agreement should be framed, consult an attorney to avoid unnecessary future liabilities.