Checklist for Officers and Directors to Maintain Corporate Shield
It is necessary that shareholders, officers and directors of your corporation follow certain guidelines during the life of the corporation to prevent challenges by the Internal Revenue Service and attempts by creditors and others to hold shareholders personally liable for corporate debts:
- 1. Corporate Name - Use the full and correct name of your corporation in correspondence and contracts. If your corporate name is Texas Corporation, do not call it The Texas Company, unless you have filed an assumed name certificate with the state.
- 2. Banking - Maintain a separate bank account for your corporation. The corporate name should be printed on all of its checks. Be careful not to mix corporate funds with your own personal funds.
- 3. Signatures - Sign documents and letters as an officer of the corporation. For example, a contract should be signed this way: TEXAS Corporation By: _________________________ John A. Smith, President This makes it clear that you don't intend to be personally bound.
- 4. Property Transfers - If any shareholders transfer personal property to the corporation, formally document the transfer by a bill of sale or as an assignment. Here is an example bill of sale form. Note that you should use a deed to place real estate in the name of a corporation.
- 5. Leases - If any shareholders lease property to the corporation, the board of directors should approve the transaction, and a lease should be signed. This applies to leases of personal property (such as a car or computer) as well as real estate.
- 6. Loans - Sign promissory notes if you loan money to the corporation or borrow money from it, and have these transactions approved by the board of directors. Make sure the interest rates and terms of repayment meet IRS guidelines.
- 7. Employment - If any shareholder is to be hired by the corporation as an employee or independent contractor, have the board of directors adopt a resolution approving this action. Also, enter into a written contract. Remember that the corporation is responsible for withholding taxes for all employees - even those who are shareholders.
- 8. Taxes - Pay federal and state withholding taxes promptly. Officers, directors and principal employees of closely held companies may be personally liable for payment of withheld taxes if the corporation runs out of money.
- 9. Records - Keep your corporate records up-to-date by including minutes or resolutions at least annually for shareholders and directors. At a minimum, these shareholders should elect the board of directors, and the board of directors should elect its officers.
- 10. Cosigning - If the corporation borrows money from a bank and you're asked to cosign a promissory note, be sure you understand the extent of your personal liability in case the corporation defaults. Most banks won't lend money to a brand-new corporation without a cosigner or other security.
- 11. Annual Franchise Tax Reports - File your annual franchise tax report with the state of Texas each year. There are financial and personal penalties if you don't file on time.
- 12. S Corporation - If you elect S Corporation status for your corporation, be aware that the election (IRS Form 2553) must be filed by the 15th day of the third month of your tax year. All shareholders must join in the election.
- 13. Stock Transfers - Before you transfer stock or sell additional shares, get legal advice so that you don't run afoul of federal and state blue sky laws. In most cases, there will be an exemption available, but you don't want to get involved inadvertently in a nonexempt transfer or issuance.
- 14. Insurance - Check with your insurance agent to make sure that there is public liability coverage not only for property owned by the corporation but also property leased to the corporation, and your own property which may informally be used for corporate business.