ENTITY FORMALITIES
Many small business owners have formed or are considering forming corporations, LLCs, or other "limited liability" entities to own their businesses.  The primary legal advantage of setting up a limited liability entity is to protect the business owner's personal assets from business risks.  If the business is operated as a limited liability entity, a creditor of the business cannot satisfy business debts from the business owner's personal assets.  This limited liability 'shield' can be lost, however, if the business owner doesn't operate the entity in accordance with certain legal formalities.

Here are five ways to help maintain the limited liability shield of a corporation or other limited liability entity:

1.  Make the Business's Limited Liability Status Known to the Public.  Customers and clients must be made aware that the business is a legal entity separate from its owners. The entity should hold itself out to the public at all times as a corporation, LLC, or whatever type of limited liability entity it is.  All letterheads, checks, billheads, invoices, advertising, business cards, and telephone listings should use the entity's full name (including the "Inc.," "Corp.," "LLC," or other ending, which indicates its status as a limited liability entity).

2.  Sign Contracts and Correspondence Properly.  Whenever an officer or employee of the entity signs a letter, contract, or check, or circulates business cards on behalf of the entity, his capacity as an agent of the entity should be clearly indicated and his correct title should be used.  For example: "XYZ, Inc. By: John Doe, President" or "John Doe, Manager, XYZ, LLC," not "John Doe, Owner, XYZ".

3.  Register Trade Names.  If an entity uses a trade name (any name other than its full legal name), the trade name must be registered with the Colorado Secretary of State.  Forms can be obtained from the Secretary of State [(303) 894-2251 or http://www.sos.state.co.us/pubs/business.html] or from our office.

4.  Keep Records of Actions Taken by the Entity.  The entity's directors or managers should consider and approve by formal action all of the entity's important transactions, such as major business agreements, loans, employment agreements, and leases.  If there is a pattern of individual action without the directors' or managers' approval, the individuals involved risk a legal determination that they were acting and are responsible as individuals for the actions taken.  All actions approved by the entity's directors or managers must be evidenced by written resolutions or meeting minutes.

5.  Have Annual Meetings.  The shareholders or members of an entity should meet annually to elect new directors or managers of the entity and to ratify the actions taken by the entity in the last year.  Even if no new directors or managers will be elected, the meeting should be held to maintain the formality of the entity structure.  In a corporation, the directors should also meet annually to appoint the officers.  Executed minutes of meetings and resolutions should be kept with the rest of the entity's records.  The formalities of an annual meeting can be simplified if all the people who would be invited sign a consent document, indicating their agreement to all of the actions taken by the entity.

If you would like to bring your entity into compliance with these rules, or if you have any questions, please call our office at your next opportunity.