Crystal Lake Corporations

Many people transact business using a corporation. Many people may not even know why they use a corporation. The sole reason for using a corporation is to protect the shareholders (investors) from personal liability for the corporation's debts. This is referred to as the “corporate shield”.

In some cases, people who have stock in a corporation assume they are protected, when in fact, they, or the corporation, are doing things, or not doing things, which still make them vulnerable to a suit directly against the corporation’s shareholders. When a plaintiff sues a corporation’s shareholders, that plaintiff is attempting to “pierce the corporate veil”, in order to hold the shareholders personally liable for the debts of the corporation. Whether the plaintiff is successful will depend upon how closely the corporation has followed the proper corporate forms.

The following are some of the more important things which a corporation and its officers should, or should not, do in order to ensure that the expected protection of the shareholders remains in place:

1.) File your annual report on time each year;

2.) Have an actual meeting of the shareholders, with proper notice, at least once each year (in some cases you may, in lieu of such a meeting, prepare a “Memorandum of Action” which all of the shareholders sign, outlining the shareholder’s agreements for the coming year). This meeting should, at a minimum, elect directors and should also address anything else which shareholders would normally vote on;

3.) Have an actual meeting of the directors, with proper notice, at least once each year (in some cases you may, in lieu of such a meeting, prepare a “Memorandum of Action” which all of the directors sign, outlining the director’s agreements for the coming year). This meeting should, at a minimum, elect officers and should also address changes in salaries, bonuses, dividends to the shareholders, significant purchases of real estate or new equipment, employee contribution plans and similar issues which are outside of the corporation’s regular course of business.

4.) If the corporation makes a major decision mid-year, document that decision with mid-year meeting minutes;

5.) Maintain records of the minutes in a corporate book;

6.) Keep adequate insurance on the activities which the corporation is engaged in;

7.) Elect officers who will actually perform duties, rather than figureheads;

8.) Distribute money from the corporation to the shareholders ONLY by either salary, bonuses, etc. or by a properly declared dividend;

9.) Do not co-mingle funds with other entities, or with shareholders. Maintain a separate bank account;

10.) Keep accurate accounting entries of such distributions to the shareholders;

11.) Refrain from using the corporation’s bank accounts to purchase items which will be owned or used exclusively by the shareholders. Such items should be purchased out of a shareholder’s own funds after a proper distribution;

12.) Keep adequate funds for meeting your expected debts;


This is not a complete list, but addresses some of the more common mistakes which small corporations tend to overlook when operating a corporation. In order to insure that you are not exposing yourself to a suit to “pierce the corporate veil”, you should consult an attorney. Protecting shareholders is the only real purpose of operating a corporation, so particular attention should be directed to ensuring such protection.

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