Avoid Personal Liability for Your LLC's or Corporation's Obligations - Practice Good Maintenance

Routine governance for your limited liability company ("LLC") or corporation is one step toward avoiding personal liability for its obligations.

The good news is routine governance for your LLC or corporation (collectively "Company") is not overly complicated. It is a lot like regular oil changes for a car. Most people can do it themselves, but many of us, including the authors, choose to pay others to handle the chore for them. Our firm provides annual update services for its clients. For more information please contact attorney Jai H. Kim at 949-340-3400.

The key issues are:

1. Annual Meeting of Equity Owners. The meeting should be properly noticed and scheduled. Corporations should elect the board of directors (check By-Laws or Operating Agreement for terms, etc.) and generally approve any action requiring shareholder approval or in the alternative approve all actions of the board retroactively. Most Companies allow for actions to be taken by written consent in lieu of the annual meeting, which is especially useful for Companies with relatively few shareholders or members (again check By-Laws or Operating Agreement). If a meeting is held, minutes should be taken. At the following meeting, the minutes should be circulated and approved by motion. Not all LLCs require annual meetings.

2. Board of Directors Meeting (for corporations). Boards of Directors for corporations should meet no less than annually. The Board should appoint or reappoint officers and approve of actions of the officers. Any unusual business generally requires the approval of the Board of Directors, for example most company financings require board approval. Minutes of each meeting should be taken and approved at the next meeting.

3. LLCs - LLCs come in two types: member managed and manager managed (check both Articles of Organization and Operating Agreement, which will specify type and procedures). Member managed LLCs generally operate with the members serving as a board of directors; however LLCs are very flexible and specific provisions should be in the Operating Agreement. Manager managed LLCs generally provide for a manager to run the Company subject to the terms of the Operating Agreement and certain legal limitations on the manager's power. The manager may be more than a single person, in which case the Operating Agreement should provide procedures for decision making by the manager group. It is wise for any non-routine decisions to be properly documented.

4. Ownership Register. Each Company should maintain a current Ownership Register which lists all parties holding ownership interests, the amount of those interest and any transfer of interest.

5. Annual Filings. In California, Corporations are required to file an Annual Statement of Information. LLCs are required to file a Statement of Information every 2 years.

6. Annual Tax Filings. Both LLCs and Corporations are required to file annual tax returns in California.

The proper creation, maintenance, and upkeep of formal Company records and compliance with all applicable laws and regulations is important for a number of reasons, including minimizing the risks of an owner being held liable for a Company's debts. In California, in certain circumstances courts may hold a stockholder, member, owner and/or equitable owner of a Company liable for the Company's obligations and debts through the doctrine of alter ego, which is also known as "piercing the corporate veil."

There is no litmus test the courts use to determine whether to pierce the corporate veil. Instead, the court's decision will turn on the specific facts of each particular case. Ultimately the courts examine those facts that help it decide whether the owner and the Company are really just one "personality" that should be treated as one and the same. In so doing, among the numerous factors courts consider are: (1) the failure to maintain company minutes or adequate corporate records, (2) the failure to keep separate the owner's personal records and the Company's records, and (3) the failure to follow legal formalities, such as holding and documenting meetings and elections, and taking formal Company actions. Taking care to properly maintain your Company's records is a good start to avoiding some of the circumstances that could lead a court to finding you to be your Company's alter ego and pierce the corporate veil.

If you would like Shulman Bastian Friedman & Bui LLP to assist you or your Company in properly maintaining your Company records and performing annual meetings and elections, please contact Jai H. Kim at 949-340-3400. If you find you or your Company in or about to be in a lawsuit or involved in litigation over whether you or your Company is an alter ego or the court is being asked to pierce the corporate veil, please contact Shane Biornstad at 949-340-3400.

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