Corporate formalities are the operating rules and guidelines a corporation or other liability-protecting entity must follow to meet its operational requirements, allowing it to maintain the corporate protections the law affords.
Many business owners are unaware that incorporation is not merely the filing of the Articles of Incorporation with the Secretary of State. Where your corporation or LLC does not follow the required rules, including but not limited to maintaining bylaws or operating agreements, formalizing initial and annual meetings of shareholders and directors, filing the statement of information forms, and maintaining a corporate book, you will likely face penalties and lose your liability protection.
As one of the primary benefits of incorporation is liability protection, a failure to follow corporate formalities may result in your personal assets being targeted in the event of a lawsuit against your company. Similarly, where you have realized the benefits of self-employment tax savings because of your corporate status, and you have not maintained corporate formalities, then in that case, an audit will likely result in you paying back the total self-employment tax you would have paid had you been a sole proprietor.
