To Be or Not to Be...A Corporation

A feature of Coaches’ Corner for Ice Skating World

by David Shulman (PSA Legal Counsel – 1997 )

A number of skating coaches have sought to operate businesses other than the teaching of skating to accumulate property and earn income. During the course of this quest for additional income and a more secure future, business opportunities may arise which suggest the forming of a corporation to operate that business.

The leading reason for incorporating any business is to gain personal protection from the corporate debts. If someone gets hurt on your business premises or perhaps a deal goes badly, you want to make sure that the only assets which are in jeopardy belong to the corporation. You don’t want to have your personal estate being attached for the debts of a business which you operate. If you incorporate your business and properly follow the rules governing corporations, you may avoid personal liability and attachment of your personal assets for the business debts. If you fail to follow the rules, a court can pierce the corporate veil and hold you and other owners personally liable for the debts of the corporation business. It is therefore important that you understand exactly how a corporation is expected to operate and follow all of the rules for such operation.

Until recently, corporations could only operate for a limited duration and have a limited allowable purpose. Most legislatures have now allowed corporations to be formed under a new business structure, the limited liability company (LLC) which offers liability protection as a corporation with fewer restrictions. It is relatively easy to begin the corporate structuring by forming a limited liability company but certain rules should be followed at the outset.

Provide enough capital upon the formation of the business to meet your expected expenses.
Keep business records separate from personal records.
Document all transactions between the business and any of the corporate shareholders – owners.
File all reports required by your particular state’s secretary of state.

Because legislatures allow corporations to shield their owners from liability and thus encourage business development, it is important that the shareholders-owners follow all of the established rules required for the operation in any particular state. When you are forming your corporation, make sure that there are enough assets to operate and pay all creditors at the beginning of the corporate existence. Always keep separate income and expense sheets for personal expenses versus corporation expenses. Hold annual meetings to elect officers and directors, even if they are the same people as the shareholders. Minutes of these meetings must be kept. Nothing is more exciting than to have an audit by a state taxing authority only to discover that five years of corporate records need to be constructed in the lawyer’s office two days before the audit is to take place. Not only is this expensive, it is very dangerous to the corporate existence.

Be sure to file any annual reports with a proper state agency. Failure to file these reports, and pay any filing fee, could result in the corporation being dissolved. Make sure major decisions are made by all of the directors as required under the operational rules of the corporation. One individual making decisions without consulting the board, when it is required to do so, could result in a court ordering the dissolution of a corporation which is a fraud.

Finally, make it clear that the business is operating under a corporate structure. Always have officers sign contracts and purchase orders in the corporation’s name, never in their own name. Failure to properly indicate your corporate capacity could result in personal liability for any business debt to which you have agreed to pay.

Whenever corporate funds are used to pay any of the owner’s personal expenses, it should be authorized by the directors as part of the owner’s compensation package. Always, always treat the corporation as a separate legal entity. Operating under the rules as suggested may be a nuisance but it is the price for protection of your personal estate.

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