Observing Corporate Formalities: Protecting Your Personal Assets from Business Creditors

Justice Scales MoneyBy Attorney Patrick Noaker

One of the most important benefits of creating a corporation or limited liability company (LLC) in Minnesota, is the protection of personal assets from business creditors.  In Minnesota, stockholders of a corporation or member owners of a LLC, are not personally liable for debts of the corporation/LLC.  This means that creditors of the corporation/LLC cannot seek to satisfy judgments related to business activities of the corporation/LLC, against a stockholder’s or owner member’s personal assets such as his or her home, lake cabin, investment accounts etc.  This protection begins when the corporation/LLC is created and, if the proper steps are followed, this protection remains for the life of the corporation/LLC.

With that said, maintaining this personal liability protection takes some effort by the stockholder/member owner.   In the case Victoria Elevator Co. v. Meriden Grain Co.[1], the Minnesota Supreme Court established eight factors that Minnesota courts must consider when deciding whether to “pierce the corporate veil” of a corporation/LLC and allow business creditors to pursue stockholder or owner member personal assets.[2]  Those factors are:

(1) whether the business had sufficient capitalization for purposes of the corporate undertaking;

(2) whether the business observe corporate formalities;

(3) whether the business paid dividends;

(4) whether the business was insolvent at the time of the transaction in question;

(5) whether the dominant shareholder siphoned funds from the business;

(6) whether other officers and directors functioned within the business;

(7) whether the business kept corporate records; and

(8) whether the corporation was merely a facade for individual dealings.

The topic of this article is factor number (2), observing and documenting corporate formalities.  There are a number of aspects to corporate formalities.  The first aspect is whether the corporation/LLC was properly created in the first place.  Was the business was registered with the Minnesota Secretary of State when it was created?   Did the corporation/LLC adopt Bylaws, elect a board of directors or board of governors?  Did the board make written resolutions establishing bank accounts and approving initial ownership of the business?

 

Once created, the corporation or LLC must continue to observe corporate formalities.  The business must always use “Inc.”  or “LLC” on its checks, letterhead, signs, vehicles and contracts.  The business must have a separate bank account and have separate financial records.  When signing on behalf of the corporation or LLC, the signature block should appear as:

ABC LLC

__________________________

By: Patrick Noaker

Its: Chief Manager/President

In addition, there are yearly formalities that must be observed.  Every corporation/LLC should have an annual meeting and document that meeting with written minutes.  If you are a single member or small corporation/LLC, this process will feel fake, even disingenuous.  If there is only one member of your board of directors or governors, having a vote will feel laughable.  It is like arguing with yourself, you will always win.  As silly as it feels, in the word of my father “I don’t make the rules, I just follow them.”  Similarly, significant changes in the business must be documented and approved by the board during the annual meeting. Minutes from that annual meeting must then be kept with the corporate papers.  Finally, an annual financial report of the corporation/LLC must also be filed with the corporate papers.

Further, it is important to remember that registration with the Minnesota Secretary of State must be renewed every year.   Failure to renew can be viewed as not observing corporate formalities and also have significant impact on the rights of your company in court.

As is the case with many legal issues, the challenge with corporate formalities is that a determination is made at a later date as to whether your efforts today are sufficient.  This can take the character of building a case, before there is even a case.   There is no magic bullet.  It is the combination of the many factors described above that may be evaluated by a judge.   When it comes to preserving your personal assets from business creditors, it is definitely worth the effort.

Noaker Law Firm LLC offers a service to businesses to review business records and conduct and document annual meetings in order to comply with the corporate formalities described above.  Contact Patrick Noaker by phone (612) 839-1080 or email patrick@noakerlaw.com to schedule a review and annual meeting.

About the Writer:  Patrick Noaker is a business attorney in Minnetonka, Minnesota who aggressively represents businesses in the courtroom and arbitration.    Find and follow him at NoakerLaw.comLinkedInFacebookTwitter and Pinterest.


[1] 283 N.W.2d 509 (Minn. 1979).

[2] Minn. Stat. § 322B.303, Subd. 2 states that the same conditions under which the corporate veil may be pierced for a corporation, also apply to limited liability companies.

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