From time to time I get asked this question from small business owners. My response is typically a question along these lines, “How attached are you to your boat?”
This might sound like a strange response, and it certainly does not apply in all circumstances, but the point is that the failure to follow corporate formalities could result in losing the corporate shield of liability – resulting in personal liability for a claim – and thus a sudden decrease in ownership of personal toys, or worse.
Generally speaking, shareholders are not liable for corporate obligations. MCL 450.1317(4). Over time the phrase “piercing the corporate veil” has evolved to mean that this corporate shield from liability can be erased.
Typically, the courts focus on five factors to determine if a shareholder should be held personally liable for a claim. These factors are:
- a failure to follow sufficient corporate formalities beyond the initial filing of the articles of incorporation;
- severe undercapitalization;
- the corporate entity was used as a device to achieve fraud;
- a pervasive failure to document transactions between the owners as individuals and the corporation; and
- a general failure to keep financial records of the corporation separate from those of the individual shareholders.
Keeping proper corporate records is not just a good idea to prevent liability, it is also required under the law. The Michigan Business Corporation Act requires corporations to keep:
- books and records of account and
- minutes of the proceedings of its shareholders, board (and executive committee if your company has one)
Corporate record-keeping is typically on the bottom of the list when facing the demands of any given day. However, it is important to note that maintaining corporate records is a factor the court considers when determining if you will be personally liable for company debts, and is required by Michigan law.
For assistance with your corporate records, contact Hilger Hammond at 616-458-3600.