One of the foundations of the law of corporations is limited personal liability for the officers and shareholders. In other words, the liabilities of a corporation are treated as separate and distinct from the personal liabilities of the officers and shareholders. However, in Massachusetts, there is an exception to the rule of limited liability. In the context of litigation, a reviewing Court may “disregard the corporate entity,” and hold the officers and shareholders liable for the debts and claims against the corporate entity under certain special circumstances. These circumstances are reviewing together as a whole, rather than on an individual basis, and, it is therefore important to undertake responsibility to ensure that your Massachusetts Corporation complies with existing law and does not meet the criteria for disregarding a corporate entity.
One of the twelve circumstances that a Court may take into account when disregarding a corporate entity is examining whether the corporation has complied with and observed corporate formalities. The lesson here is that a Corporation must strictly observe corporate formalities. What exactly are corporate formalities? A corporate is required to maintain, keep, and observe certain records and formal procedures that indicate that the corporation maintain a separate existence from the shareholders’ personal business affairs. Some of the necessary corporate formalities include the following:
· Stock Register (Ledger): A written record that states the names and addresses, as well as the amount of shares, owned by each shareholder of the corporation.
· By-Laws: This is an established set of rules and procedures that state how the corporation will be operated, and how the corporation will deal with certain factual scenarios affecting its business affairs.
· Board of Director Meetings: The Board of Directors must meet frequently, as specified by the Corporate By-Laws, and a record (meeting minutes) must be maintained and kept on file.
· Shareholder Meetings: Shareholder meetings must occur at least once per year, and a record (meeting minutes) must be maintained and kept of file.
· Meeting Minutes: A record that states the date, time (time of commencement of meeting, time of conclusion of meeting, time of significant event, decision, vote, etc. at meeting).
· Bank Accounts: The corporation must maintain a separate bank account from the individual shareholders.
· Tax returns: The Corporation must file all of its income tax returns with the Massachusetts Department of Revenue and Internal Revenue Service, and pay all taxes due on such returns.
· Annual Reports: The Corporation must file current annual reports with the Massachusetts Secretary of State, and maintain a resident agent for service of process inside the Commonwealth at all times.
· Permits / Licenses / Certificates: The Corporation should maintain current and active licenses, permits and certificates requires for its type of business, including a DBA certificate filed with the proper town or city.
The above is not a conclusive list of corporate formalities that must be observed by all Massachusetts corporation. Compliance with observation of corporate formalities is essential for maintaining the corporate status and limited personal liability for corporate officers and shareholders. There may be other formalities that should be observed including, evidencing that assets are titled in the name of the corporation, all business transacted occurs in the name of the corporation, rather than the shareholders, etc. Typically, the corporate Secretary undertakes the responsibility for maintain compliance.
New small businesses can begin to maintain corporate formalities by ordering a “corporation kit” from most well-known office product suppliers. These kits will contain templates for meeting minutes, stock registers, shares of stock, notices required for board of director meetings, notices required for shareholder meetings, as well as a corporate seal necessary to execute these documents.
If you are an established business, please feel free to contact me at 617-669-9780 to verify whether you are in compliance with observing corporate formalities.