Personal liability can devastate the accumulated riches of a lifetime of work. This form of liability opens the individual to claims for a wide range of business obligations. Most people realize that personal liability may extend to business losses, but other obligations may also reach individuals. The limited liability offered by corporations, limited liability companies, and limited partnerships, shelters business owners from personal liability. Some insurance can also help cover business owners, directors, and officers. However, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.

?. What are the differences between C and S corporations?

The Internal Revenue Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes

Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders' individual returns

Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by subchapter C. To receive subchapter S treatment, corporations:

• Must be domestic; 
• Must not be affiliated with a larger corporate group;  
• Must have no more than thirty-five shareholders; 
• Must have only one class of stock; 
• Must not have any corporate or partnership shareholders; and  
• Must not have any nonresident alien shareholders. 

Additionally, after a business is incorporated, all shareholders must agree to subchapter S treatment prior to electing that option with the Internal Revenue Service. The limitations imposed by the subchapter may affect the transferability and marketability of corporate shares.

?. What types of legal procedures should corporations maintain?

Once incorporators establish a new business, the directors must ensure that it retains its legal status. Depending on the business form, certain legal formalities must be followed for this purpose. Once incorporated, an ongoing business's obligations include:

• Obtaining federal and state tax identification numbers for the business, and filing needed tax returns annually; 
  
• Issuing shares of stock as mandated by the articles of incorporation and securities laws; 
  
• Establishing and maintaining corporate books and records, including accounting ledgers, shareholder records, and corporate minute books; 
  
• Calling and conducting an initial meeting of the board of directors or shareholders as required in the articles of incorporation; 
  
• Holding future meetings at least as often as required by applicable business laws; 
  
• Conforming all decisions and internal procedures to the outline set forth by the articles of incorporation; 
  
• Recording all actions and decisions of the board of directors in the corporate minute book; and  
  
• Maintaining annual registration with the state government as required by law. 

Additionally, some businesses must comply with licensing requirements or professional standards to preserve their status. These businesses may need to maintain further records or use special procedures or equipment based on rules for their specific industries.

In many situations, a failure to honor these and other corporate obligations may result in personal liability for directors, officers, or shareholders for business obligations and debts. Because of these harsh consequences and because the specific legal requirements vary depending on the business's location and form, businesses should seek professional legal assistance.

?. What is "piercing the corporate veil?"

Disclaimer
The information contained in this website is for information purposes only and is not intended to constitute legal advice or a solicitation of clients. It does not create an attorney-client relationship between the reader and Kamkari Law Firm. Professional legal counsel should be sought for specific opinions or situations.