A corporation is a legal entity that is separate from its shareholders, directors and officers, and limits the liability of those individuals. Every Pennsylvania corporation is statutorily required to maintain certain corporate formalities to preserve its status as a separate legal entity and, therefore, insulate its shareholders, directors and officers from personal liability. Shareholders and their advisors must remain vigilant to maintain the corporate formalities.
The Pennsylvania Business Corporation Law of 1988 sets forth requirements that shareholders, directors and officers must follow. The most basic of these formalities is annual meetings of shareholders and directors. Corporations are required to have at least one shareholders’ meeting and one directors’ meeting each year (or a written consent in lieu of such meeting), respectively, where the shareholders elect the board of directors and the board of directors elect officers of the corporation for the following year. (cite)
Significant corporate actions should also be memorialized at the annual meetings. Such actions may include loans to or from the corporation, distributions, purchases of real estate, leases of property, purchases of a significant amount of personal property or equipment, and any other significant matter regarding the operations of the corporation. See Fletcher-Harlee Corp. v. Szymanski, 936 A.2d 87 (Pa. Super. Ct. 2007) (Failure to adhere to corporate formalities includes failure to keep relevant records such as real property leases, equipment leases, financial records, loan documentation, and bank statements).
Limited Liability Companies (“LLCs”) are also separate legal entities affording personal liability protection to its individual members. Members of an LLC are also required to maintain certain formalities to preserve the LLC’s status as a separate legal entity; however, these requirements are less rigid than those pertaining to corporations. There is no statutory requirement for annual members’ meetings or specific record-keeping formalities. Because of this, it is easy for members of an LLC to fall behind on observing legal formalities required to maintain personal liability protection and avoid the possibility of “veil piercing.”
Notwithstanding the relative informality of LLCs, courts will permit “veil piercing” and impose personal liability on members where there has been a significant disregard of formalities, such as failure to maintain fundamental bookkeeping, employee tax documents, documentation of purchases and revenue, and other materials one would expect a legitimate company to maintain. See Reivia Ashley, LLC v. Paselo Logistics, LLC, et al., PICS Case No. 17-1882 (E.D. Pa. Dec. 1, 2017), Digest of Recent Opinions, Pennsylvania Law Weekly, 41 PLW 19 (January 2, 2018).
Maintaining formalities required of a corporation or LLC may seem like a menial task, but it is critical in preserving an individual’s traditional insulation from personal liability. Generally, when a corporation or LLC engages in misconduct, a cause of action will lie against only the entity itself while its individual constituents remain insulated from legal action. Where, however, it is determined that the entity’s constituents have failed to properly observe legal formalities, courts will permit creditors to “pierce the veil” of the corporation or LLC to seek recovery from the corporation’s shareholders, directors and officers or the LLCs members, as applicable.
Maintaining proper formalities of a corporation or LLC is not difficult; however, it does require a certain degree of discipline and sound judgment. The Business Law Team at Maiello, Brungo & Maiello, LLP are available to advise business owners and their advisors on maintaining these formalities and protecting owners from personal liability.