We are here to help you

Basic Information about Corporation and Its Preparation by Laws

Many entrepreneurs choose corporation because it gives them “limited liability” which means that when facing bankruptcy, personal assets such as house and cars will not be liquidated to pay their business debts.

For instance, when a corporation owes a creditor $1 million, the owners will not be forced to sell their personal assets just to pay the business debts. Only the business assets will be liquidated to pay for the company’s liabilities and debts.

However, corporation owners’ personal assets are not covered by limited liability law if:

• their actions directly injure someone


• they intentionally commit fraud which causes harm to their own business or to other entities


• they fail to pay taxes withheld from their employees’ wages


• they personally agree to become guarantors to a business debt or bank loan on which their corporation fails to pay


• they treat their corporation as an extension of their personal asset rather than a separate entity

Despite the advantages of having a corporation set-up, owners are still legally responsible to do corporate formalities such as hiring board of directors who will make decisions; keeping records; and paying corporate taxes.

Corporate formalities are very important to legitimize a business as corporation. According to lawyers, failing to do these means that owners’ personal assets are not protected from their company’s debts and liabilities.

Here are the corporate formalities which business owners must follow:

• regularly holding directors and shareholders’ meeting


• investing adequate money to the company


• keeping relevant transactions and business records


• formally providing stocks to shareholders

When choosing corporation as a business structure, it is important that owners should have an insurance coverage to protect their companies’ assets from legal claims and lawsuits. Lawyers said that having insurance is probably the best way to prevent bankruptcy and liquidation of assets.

For instance, a grocery owner is advice to have a liability insurance that will cover the damages in case that a customer slips and falls inside the store. With strong liability insurance, owners will not have to use their personal assets nor the corporation’s.

Meanwhile, an owner of a corporation that also works for it will also receive salary, pay income taxes, and report personal tax return just like any regular employee.

In forming a corporation, legal preparation required by the federal law should be done to become a legitimate business company.

This is a step-by-step procedure in establishing a corporation:

• File “Articles of Incorporation” to the state’s corporation division. Usually, a $100 fee is required. According to lawyers, this form is short and easy to prepare that owners are only required to write the name of their companies, its address, contact details of the “registered agent”, and (some states) directors of the corporation.


• Create “Corporate Bylaws”. This is a corporation policy that will serve as guide on how and when to conduct directors and shareholders’ meeting and the number of votes needed to approve business decisions.


• Issue a stock certificate to shareholders (initial owners) of the corporation.

San Fernando Valley - (Satellite Office)

5850 Canoga Ave., Suite 400
Woodland Hills, CA 91367
1-818-401-4747
info@mesriani.com