Governance and compliance protect the veil for California and San Diego small business owners, and those who maintain LLCs, S Corporations, Professional Corporations, Management Service Organizations or C Corporations.
Important Takeaways for How Corporate Governance and Compliance Protect the Corporate Veil:
- The U.S. Supreme Court ruled a corporate entity is separate and unique, just as each human is unique and separate from one another.
- The “corporate veil” is the protection of the company that separates it from the personal assets and liabilities of its owners, and allows them to take business risks.
- If the corporate veil is not protected, creditors of the business can pierce the corporate veil in order to pursue the personal financial holdings of the owners to satisfy company debt(s).
What is the Corporate Veil and Why is it Important?
The corporate veil is simply the legal protection that separates a business from it’s owners in terms of legal and financial liability. A corporation, under the law, is legally a “separate entity.” A separate entity is like the difference between two separate people. You can’t sue or pursue one individual person for another individual person’s debt. Therefore, a corporate entity establishes an important and separate wall of protection for those who own the company. A creditor cannot pursue the owner of a business personally to satisfy a business obligation (unless the business person has signed personally for the debt or obligation).
However, if the corporate veil is not properly maintained a creditor can “pierce the corporate veil” by establishing that there is no real difference between the corporation itself and those who own it. This opens the door to allow creditors to seek legal and financial action directly against the owners, shareholders and members of the corporate entity. Many small and mid-sized business owners simply get caught up in day-to-day business challenges and activities, and forget to take the steps required by law to preserve their valuable LLC or corporate protections. Governance and compliance protect the corporate veil and the interests of those who own the company.
How Can You Protect the Corporate Veil Through Governance and Compliance?
What is corporate governance and compliance and how do governance and compliance protect the corporate veil here in San Diego and across the State of California? Owners of a California corporation are required to hold an annual meeting of the members, or directors and shareholders. While LLCs may not be required to hold an annual meeting, it is an important discipline to ensure that no creditor may pierce the corporate veil.
The meeting requires notes, and these should include the date, time and location of the meeting as well as those present. The minutes should record any votes that took place, and an update on the corporation’s short and long-term goals. Members or shareholders who are present should sign the minutes. It is important to record any significant decision, action, goal or plan regarding your company and how it conducts its business.
Medical practices and healthcare organizations should be vigilant when it comes to healthcare orporate governance and compliance. In addition to the needs of any corporation a medical practice and/or healthcare-related business must ensure observance of all federal, state and local laws as well as regulatory compliance with issues such as Stark Law (anti-kick back) and HIPAA.
All LLCs and corporations must also file an annual California Statement of Information and pay fees of approximately $25. The statement of information confirms basic name and physical mailing address for the corporation’s agent, as well as the names, titles physical mailing addresses for corporate officers. California requires an annual franchise tax of at least $800. “Franchise” in this instance relates to the enfranchisement of your company’s right to conduct business in the State of California. If you have a California business, you must pay the annual California Franchise Tax.
In addition, changes in federal, state or local laws may require an update to corporate documents. Ensuring that corporate bylaws and the shareholders agreement or operating agreement (LLC) are in compliance with one another is a critical annual corporate task. Your Watkins Firm corporate attorney will help to review and update corporate documents and ensure they are in agreement with each other and compliant with state and federal law.
Pro-Tip: “The corporate veil applies to both limited liability companies and corporations and also some other trust and things like that. But if you have a separate business entity, you have something called a corporate veil. And the thinking is if you keep everything separate and you treat it as a separate entity, you don’t co-mingle funds. You don’t fail to keep records. Then if there’s an obligation of the corporation or if there’s no statute saying it goes right to the primary owner, owners, and shareholders, then you are not personally liable for that. And that means you can take more risks in the business place. You can take out loans, you can get vendor contracts, you can get employment contracts, you can do all kinds of things, joint ventures, mergers, all kinds of things in the name of the business.
Corporate governance is maintaining your corporation in a legal and proper fashion, such that you’re in compliance with all the laws of the state of California, so that you may be respected in your corporate form as a separate legal entity. It’s about fairness, it’s about fraud, it’s about doing business in a proper manner, which doesn’t rip off customers, doesn’t damage vendors or lenders. If you maintain your corporation in a proper fashion, keep your minutes, keep your statement of information with the Secretary of State filed, have your meetings and maintain proper records and do business separately, then you should have benefits.
You should have tax benefits, you should have investor benefits. You should have benefits of when you want to sell your company. And someone comes to look at it like when we sell a company, we have to come up with something called schedules. Schedules are what we use to identify all the different elements to tell a buyer this is a proper corporation and it’s a safe bet to purchase or to merge with. So all those things. And on top of that, if you comply with corporate governance, you’ll end up doing better in business over the last 35 years. The ones I see that don’t hold their meetings, that don’t keep records, that don’t refuse to commingle, those ones don’t do as well. The ones that really stay on it and run their business the right way are usually much more successful.” – Dan Watkins, Founding Partner
Proven California and San Diego Corporate Attorneys
Corporate governance and compliance protect the corporate veil. The experienced and proven California and San Diego corporate attorneys at the Watkins Firm provide 40+ years of experience to help you to protect the corporate veil through governance and compliance on a regular basis. These issues are not meant to simply be a chore, or some regular drudgery a business owner must undertake. They are established to preserve the valuable protections of the corporate veil that your corporation or LLC provides. Protecting the corporate veil preserves your personal assets and peace of mind. If you have questions about corporate governance, compliance or duties associated with the protection of the corporate veil we invite you to review our podcast Episode 24 – Corporate Governance and Compliance as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
