by Bruce L. Dorner
The client sitting across the table says, “I set up my own corporation with the Secretary of State.” I ask for copies of the documents and receive three sheets of paper. I ask if they have copies of the minutes of the meeting of the shareholders to elect officers and directors. I ask if they have votes to authorize designated officials to open bank accounts and to sign checks. I ask if they have issued stock certificates. I ask if they have adopted by-laws for the governance of the corporation.
A blank stare is what usually follows these questions and a statement from the client, “what’s all that stuff?” I then start a long and careful dialog about what a corporation is, what it does, and how to care and feed this statutory creature.
The New Hampshire Secretary of State has made it very easy for individuals to fill out forms to incorporate or create a Limited Liability Company (LLC). Most people think that the filing of these pages with the Secretary of State makes them “legal.” I hate to burst the bubble, but that’s simply not true. It means that you have enrolled the name and have staked out a position on the list of business entities. You may be “official” on the records of the State, but will your corporation withstand a legal challenge from a disgruntled customer?
Here’s the short story. We form business entities for two main purposes. Either we want to save money on taxes or we want to protect our personal assets from liability claims (we don’t want to get sued and lose everything.) I’m not going to offer tax advice, that’s why I always want an accountant involved in the process. However, as to liability, that is a totally different issue. If business entity isn’t fully documented and operated in accordance with legal procedures, you’re going to find out that you can be sued personally for any errors or omissions.
Permit me to offer an example. Let’s say that you go to the Secretary of State and file the incorporation papers. The State issues a Certificate of Existence saying you’re now listed on the books with the State. You’re a contractor and want to get started building your first project. You have a customer who’s ready to pay you to get going. The customer says, “Do I make the check out to you?” You say, “Sure, put it in my name.” BINGO! You have taken funds in your own name. You’re personally liable for any and all errors.
As a second example, you were smart enough to prepare the contract for your construction project under the name of your business. You even remembered to properly sign the document designating your corporate title. As the project moves forward there are some unanticipated problems and the customer is complaining. You call the customer and say, “don’t worry, I’ll be there in the morning to take care of everything.” BINGO! You made a personal promise and your corporation or LLC is not likely to protect you from a claim against your personal assets. Don’t be surprised if the attorney representing the customer places an attachment against your house or bank account.
I could offer tens, if not hundreds of examples of simple “ooops” mistakes which place business owners at risk. The best way to protect yourself is to work with professionals who can advise you how to reduce risks and keep your business on the straight and narrow path. Forming a business without an attorney is like taking out your own appendix. It’s not a complicated procedure, but do you really want to do it yourself?
This article provides general information only. It is not legal advice. You should consult with your own attorney before making any legal decision.