Making New Year's Resolutions - for Your Business
Harford Business Ledger: February 2005
Having just entered a new year, many people make personal resolutions to attain new goals with a fresh start in the new year. In my practice, I find that the resolution most often overlooked is the corporate resolution. A good 2005 resolution for all businessmen should be to get and keep their corporate house in order.
The law allows the creation of legal fictions known as LLCs, Corporations, Partnerships, Limited Partnerships and other entities. These entities provide powerful shields from liability and significant tax advantages. These entities are not tangible things which can be touched or seen, but are make-believe entities which are legally recognized by courts and taxing authorities. The only requirement of this make-believe game is that you strictly and carefully abide by the rules. If you don't, you are at risk to lose the liability protection or the tax advantage.
Very few entities abide by the documents which govern them. Many are unable to locate their by-laws and rarely conduct corporate meetings. There is also a great deal of sloppiness in adherence to corporate rules like the precise statement of the corporate name, to include the "Inc." or "Corp." or the proper signature of a corporate officer. The signature of "John Doe," as an individual, obligates John Doe personally for whatever undertaking he has signed. The signature, "John Doe, President", is the signature of a corporation by its duly authorized officer, for which there is generally no personal obligation or liability to Mr. Doe. It is very important, therefore, when you are obligating an entity that you obligate the entity and not yourself.
The liability shield created by a legal entity is sometimes called a "corporate veil." Those who seek to penetrate the shield of liability are said to be seeking to "pierce the corporate veil," and attach the personal assets of the signer rather than the assets of the entity. If an accident occurs or a contract is breached, often times the first goal of a plaintiff's lawyer is to pierce the corporate veil and attempt to attach the assets of the individuals involved in the entity. If in the course of discovery by the plaintiff's lawyers, it can be proven that the corporate formalities are often ignored, a court can be persuaded to ignore the entity itself and allow access to personal assets. As a business person, your New Year's resolution should be to keep your corporate house in order and make sure that you play by the rules of the game.
Aside from corporate governance, the second greatest threat to corporate viability is the failure to file corporate personal property tax returns with the State of Maryland. A corporation must be in good standing in order to validly conduct business and enter enforceable contracts. When requested, the State Department of Assessments & Taxation will issue Good Standing Certificates confirming corporate viability. Many transactions, particularly those involving financing and bank loans, require the borrower to produce a Certificate of Good Standing in order to close the loan. It is uncanny how this issue seems to evade attention until the morning of Settlement when the bank is unable to make the loan because the corporation is not in good standing. Nine times out of ten the reason for the forfeiture of the entity is the failure to file a personal property tax return. If you are unsure whether or not your entity is in good standing, you can check with the Maryland State Department of Assessments & Taxation web site. If you are not in good standing, the web site usually provides information about the nature of the forfeiture. If not, a follow-up phone call generally provides the answer.
In order to take advantage of the significant liability and tax benefits of an entity, it is important to maintain the viability of that entity. Make that your corporate resolution for 2005!