What Are Corporate Formalities?
When starting a new healthcare business or practice, you may hear that you should observe “corporate formalities.” But what exactly are these formalities? Do they really matter?
Starting and running a successful healthcare business can be complicated. Thus, corporate formalities sound like unnecessary administrative work. However, these practices are essential for owners of business entities small and large alike. They help you, as a business owner, maintain limited personal liability for the business’s actions.
As you may know, one of the primary aims of establishing a business entity (such as a corporation, LLC, or PLLC) is to legally separate the individual owner(s) from the business itself. Only the business entity is responsible for the business’s negligence or debts — that is, if corporate formalities are maintained. If not, the lines between the business and the people behind the business become blurred.
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What Is the Corporate Veil and How Do You Avoid Piercing It?
When the lines aren’t clear, the court may pierce the corporate veil if the business becomes involved in a legal dispute. In other words, a court could hold you personally accountable for business faults. As a result, the business entity would no longer shield you from liability, and your personal assets would be at risk.
In short, maintaining corporate formalities helps to ensure that your business affairs remain the responsibility of your business entity in the eyes of the law. Therefore, corporate formalities should be upheld by owners, practice managers, and anyone who handles the finances, enters into agreements, prepares documents, or creates public-facing materials for the business.
Corporate Formalities to Observe
While there are various corporate formalities that a conscientious practice or business needs to maintain, we include a few illustrative examples here. This list is by no means exhaustive.
Keep governing documents.
When opening a practice or starting up a business, your attorney will prepare governing documents. Governing documents formally set up how your business will operate. Governing documents also establish who will run the business and in what capacity. For example, if you have an LLC, governing documents would include initial resolutions and a signed operating agreement. Meanwhile, if you have a corporation, crucial governing documents come in the form of bylaws and resolutions. Comply with these governing documents and have your attorney update them when circumstances change.
Perform business functions in the name of the company.
The business should be completely independent from your personal identity. In other words, business conducted with all third parties should be done in the business’s name (LLC or corporation). This ensures that third parties know that you are making decisions on behalf of the company and not in a personal capacity.
Consider how you interact with the public, your patients, or your customers. Is it immediately and readily apparent that they are interacting with a corporate entity that has a limited-liability status? Things like business cards, email signatures, and checks are all opportunities to emphasize your business’s independent corporate identity.
Because many healthcare practices operate under the primary provider’s name, this can be particularly difficult — and only more important. For example, the website for Jane Doe, M.D. should be careful to use the practice’s corporate designation to alert visitors of its limited liability status. If her practice is a professional service corporation, it may read Jane Doe, M.D., S.C.
Set up a business bank account and only use it for business.
Keep business and personal funds separate. Maintaining a clear distinction between your personal and business assets will help reduce the risk of piercing the corporate veil.
First, set up a business bank account — a true business account, not merely another personal checking account that you use “just for business.” Then, use the business bank account to control your business’s money.
Ensure that your bank account always has enough funds to cover your business expenses. Store only your company’s funds in the business bank account, and don’t write checks for personal expenditures from this account. Likewise, don’t use your company credit card for personal expenses. And obviously, keep records of your business’s financial history.
What if you’ve mixed your funds in the past? Speak to your attorney. They can guide you on how to separate your business funds from your personal money and reimburse your business for personal expenses. You can reduce the risk that a judge will pierce your business’s corporate veil with corrective action.
You should regularly review your business operations and hold meetings, even if you’re a solo operator and the meeting’s only attendee. Prepare and keep written notes — the meeting minutes — from these sessions. Sometimes it’s helpful for your attorney to guide you through the initial meeting process, and then you can maintain those practices in the future.
Keep up with requirements to maintain good standing.
Make sure your business is legally compliant with state and local rules. For instance, many states require businesses to file an annual report document every year. If not done properly, it could place the business’s good standing or existence at risk.
Get Legal Support.
Corporate formalities are not a one-and-done process, and we only scratched the surface here. You must maintain corporate formalities continuously throughout the life of your business. An experienced attorney can help you implement best business practices whether you’re starting up a new business or want to ensure that your existing business meets all of the requirements.
The healthcare attorneys at Jackson LLP want to help you oversee a successful and compliant practice or business. If you operate in one of the states where we practice, book a free consultation to determine if we fit your needs.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader and should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.