Personal Liability Protection Tip for Business Owners: Observe Formalities
Observing Formalities
In our prior post, we shared a tip that can help business owners try to protect themselves personally from potential liabilities in business matters, signing for the entity. Here, we share another tip with the same goal in mind – observe formalities.
Whether you’re dealing with a corporation or an LLC, following the rules is important to try to help shield yourself from personal liability in business matters. Observe appropriate corporate formalities or the operating rules for the LLC. For example, below are three common areas to focus on regarding ongoing corporate operations and formalities that may be appropriate to follow.
Shareholder Decisions
Certain decisions of a corporation are made by its shareholders. For instance, shareholders take action to elect the board of directors of the corporation in accordance with the corporation’s bylaws. The Florida Business Corporation Act requires in part that “[u]nless directors are elected by written consent in lieu of an annual meeting pursuant to s.607.0704, a corporation shall hold a meeting of shareholders annually, for the election of directors and for the transaction of any proper business, at a time stated in or fixed in accordance with the bylaws.” Section 607.0701(1), Florida Statutes (2022).
Director Decisions
The board of directors of the corporation steers the ship. The board of directors manages the business and affairs of the corporation and considers and authorizes general operating policy. For example, the directors appoint officers per the corporation’s bylaws. The Florida Business Corporation Act requires in part that “[a] corporation shall have the officers described in its bylaws or appointed by the board of directors in accordance with the bylaws.” Section 607.08401, Florida Statutes (2022).
Separate Corporate Assets
An important aspect of safeguarding personal assets is maintaining a clear separation between corporate funds and funds of others, whether the company is closely held or large, newly formed or not. The corporation’s money should be kept separate from the personal funds of shareholders, board members, and others. Such funds aren’t commingled. Someone suing a corporation may argue that the entity should be disregarded and owners of the corporation be personally liable for obligations of the business when financial accounts and matters of the corporation are commingled with those of its shareholders, directors, or employees, for example. See e.g., Eagle v. Benefield-Chappell, Inc., 476 So. 2d 716 (Fla. 4th DCA 1985).
Related: Corporate/LLC Documentation and Meetings
Keep in mind observing formalities in an LLC or corporation such as those above may involve appropriate corporate/LLC documentation and meetings. These may include an annual shareholders’ meeting, a meeting of the board of directors, written consents, a notice of meeting, and meeting minutes, to name a few examples.
Conclusion
Having properly observed formalities and rules, and recorded decisions and actions of the business can help show meaningful separation between the entity and protect owners from potential personal liability in business matters, also known as piercing the corporate veil. This tip is an example of ways that help business owners avoid personal liability for the obligations of the business. Click here to contact Guala Law Firm if you need legal advice or assistance.
