Incorporating a business has several advantages. Some of these advantages include: protecting the assets of the shareholders and officers, protecting the assets of the business from shareholder and officers actions, improving the image of the company, separating your personal and business credit and saving money on taxes.
Each of these benefits of incorporating can easily be taken away by making any one of the three typical mistakes new corporations make. There is no guarantee that just because you incorporate all your individual assets are protected from the business. In addition there is no guarantee that all the benefits a corporation offers will automatically happen.
There is some work involved on the owners part to put the corporation in compliance and meet specific standards of the tax agencies and the courts. The three mistakes that I often see small business owners making in this area are:
Mistake #1 – No stock certificates are issued and shareholders recorded. After forming a corporation shares need to be issued to the owners of the company. Without issuing the shares, there is a potential of having the corporation veil pierced in a lawsuit because the court will claim the company is just an alter-ego of the individual.
Issue shares for the business by filling out a stock certificate and recording the transaction in a stock register.
Mistake #2 – The initial meeting of shareholders and directors is not held. Every corporation when it is first formed needs to have an initial meeting with the shareholders and directors in order to adopt the Articles of Incorporation, Bylaws and to issue the shares for the company.
Even if you are a one person corporation it will benefit you to have the meeting.
Mistake #3 – No resolutions and other documentation is kept. Every corporation needs to maintain corporate resolutions and meeting minutes. A corporate resolution is a written document that gives someone in the company authority to perform a specific action. For example, if the business needs a loan, a resolution would be written and signed by the Director of the company giving authority to an individual to open the loan and use it for business purposes.
You can tack your corporate records with a corporate record book or corporate management software.
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David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
