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Thread: MLMs and Corporate Formalities

  1. #1
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    MLMs and Corporate Formalities

    How many MLM companies and their distributors who incorporate do so properly?

    Corporate Formalities: Protect the Tax and Limited Liability Benefits of Your Incorporated Business -

    Corporate Formalities: Protect the Tax and Limited Liability Benefits of Your Incorporated Business

    Posted 12 months ago. 2 helpful votes, Comments (0),
    Written by: Robert Wayne Olson Jr
    Attorney licensed in California and 2 other states

    In order to receive the tax and limited liability benefits of a corporation, your incorporated business needs to ACT like a corporation. Here are the essential formal elements of corporate formation and maintenance.
    Consequences to Not Observing Corporate Formalities - Loss of Tax Deductions and Limited Liability

    Businesses incorporate for two main reasons: tax benefits and limited liability. However, in order to get these benefits, the business has to act like a corporation - in other words, it has to observe all the formalities that allow it to be treated like a corporation. If you have not observed the necessary corporate formalities, the IRS can deny (on audit) all your corporate-specific tax deductions you thought you had. Likewise, if your business is sued, and the plaintiff's attorney reviewing your corporate records finds you have not observed corporate formalities, he can ask the court to "pierce the corporate veil" and hold you personally responsible for the lawsuit. It is imperative that all corporations observe the required formalities to avoid these potentially disastrous outcomes.

    Corporate Formation - Complete ALL the Steps

    The first formality is to complete the initial formation of your corporation; these do not end with filing the Articles of Incorporation and getting a Federal Tax ID Number. An initial Board Meeting must be held, and committed to writing, to complete the incorporation process, even if you are a one-person corporation. For example, director(s) and officer(s) need to to be formally appointed or elected, bylaws must be approved (and obeyed), the corporation must be capitalized, stock certificate(s) must be approved in form and physically issued, bank account(s) and signing authority must be established, state regulatory filings must be made, and employment contracts approved and signed, with all original documents and certified copies placed in the minute book. Consider this question from the IRS - "How could your business act as a corporation if there aren't even stockholders?"

    Maintain Adequate Insurance Coverage and Limits

    Corporations must maintain insurance coverage with adequate limits for their type of business. For most businesses, this means carrying general liability insurance (for the slip and fall accident and other business negligence issues), auto insurance (if your business involves any driving), malpractice insurance (for professionals like doctors and dentists), workers compensation insurance (for employee injuries), and product liability insurance (for those manufacturing or selling tangible products). There are many other types of insurance, and I recommend talking to a qualified commercial insurance agent to determine your appropriate coverages and limits - but please don't skimp on limits. A business that only carries $35,000 in auto insurance, but receives a $1 million claim would almost certainly be considered to not be carrying a adequate level of insurance, exposing it to losing its limited liability protection.

    Don't Co-mingle Corporate Funds with Personal Funds

    Next, corporations and their owners cannot co-mingle corporate and personal funds. This means that all corporate income must be deposited to corporate bank accounts, and only corporate/business expenses may be paid from corporate accounts. Likewise, personal income must be deposited and personal expenses must be paid from personal accounts. Corporate employees must be paid compensation through corporate accounts, with appropriate payroll tax withholding, payments and returns. (Loans back and forth are permitted, but must be formally authorized and documented - see below.) Co-mingling of funds ignores the requirement that the corporation and the owner be treated as separate entities, with separate income and expenses. Failing to observe this formality creates the potential loss of tax deductions and limited liability......

    Submit Annual Corporate Filings

    Finally, all states require that annual filings be made to keep the state apprised of the current directors, officers, addresses and service agent of the corporation. Professional corporations may have a separate annual filing to complete, identifying their professional employees and levels of malpractice insurance. Failing to complete these filings can lead to financial penalties and/or suspension of the corporation's charter. Suspension is the ultimate penalty - the corporation cannot enter into contracts, file lawsuits, defend itself in a lawsuit, or do any business whatsoever - by DEFINITION, it is no longer a corporation.

  2. #2
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    Re: MLMs and Corporate Formalities

    How to Avoid Piercing of Your Corporate Veil - Click and Inc Shows You!
    The Corporate Veil

    Most people think that once they have incorporated they have no personal liability .. that is simply not true.
    Incorporating your business is only one step in protecting your personal assets from the creditors of your corporation. When courts impose liability on individuals for the actions of the corporation, this is called "Piercing the Corporate Veil." In order to avoid personal liability for debts and other acts of the corporation you must run your corporation like the distinct entity that it is.
    While it is impossible to tell you everything you must do to avoid personal liability for debts and other obligations of the corporation, as different courts may choose to apply varying factors in varying degrees, we can give you a solid foundation of information.
    First, the corporate veil is always disregarded by courts for criminal acts of the officers, shareholders, or directors of a corporation. Further, federal and state tax laws generally impose personal liability on those individuals responsible for filing sales and income tax returns for the corporation.

    For most other matters, the corporate veil is most often pierced by courts in situations where the shareholders of a corporation disregard the legal separateness of the corporation and the corporation acts as nothing more than an alter ego for the shareholders' own dealings. Courts often consider many factors in determining whether or not to pierce the corporate veil. Here are some of the major factors courts look at:
    • Whether the corporation follows corporate formalities( i.e., having and observing the bylaws, minutes of shareholder and board of directors meetings and/or actions, etc.);
    • Absence of corporate records;
    • Whether the major shareholders are siphoning money from the corporation for their personal use (i.e. when the principal shareholder takes money from the corporation to pay their home mortgage or buy gifts for themself, etc.);
    • Non-functioning of other officers or directors (having officers and directors who do nothing and were put in place by majority shareholder, but are not actively involved in the corporation);
    • Commingling of funds and other assets between major shareholders and the corporation;
    • Inadequate capitalization (the corporation is undercapitalized at the time transactions with creditors or others wishing the corporate veil to be pierced were entered, or simply not enough capitalization to get the particular corporation running);
    • No corporate assets;
    • Use of corporation to transfer liability of another (usually a shareholder);
    • Contracting with another without the intent to ever perform on the obligations.
    Unlike a proprietorship or a partnership, a corporation is a legal entity separate and distinct from any individuals. Generally, it is represented by its directors, officers, employees, and agents, each in their respective capacities, and is operated for the benefit of its shareholders. In closely-held corporations, the same individuals tend to act in several of those capacities; this requires an effort on the part of these individuals to maintain distinctions among these capacities when they take various actions.

    It is essential that minutes be maintained of board and shareholder actions. Corporate minutes are the first line of defense against the IRS, creditors, and other parties making claims against the corporation, particularly if a claim is based on a theory that the corporation should not be taxed as a corporation or afforded limited liability (piercing the corporate veil). Minutes can be the written record of meetings or the unanimous written actions of the directors or shareholders taken without a meeting. Either is acceptable, if properly done. Many closely-held corporations fail to keep even annual minutes, which greatly weakens the position of the corporation and its shareholders, directors, and officers in many circumstances. Regular minutes can also:
    • Prevent IRS claims of unreasonable compensation of executives who are shareholders
    • Protect against IRS claims of excess accumulated earnings
    • Create defenses against lawsuits attempting to establish personal liability of directors or officers, by evidencing board business judgment and specific authorization
    • Protect against spurious lawsuits of minority shareholders
    • Establish authority for corporate actions for the benefit of outside parties
    Minutes of a meeting should be prepared by the Secretary of the Corporation, signed, and then approved by the Board or shareholders, as the case may be, at the next meeting or in the next action. This will minimize any claim that the written minutes do not accurately reflect the action taken. Minutes should always reflect that proper notice was given or waived, who was present and who was absent, and that a quorum was present. Any abstentions or dissents on a vote should be noted for the protection of the director abstaining or dissenting. In a closely-held corporation, meetings are often held to create minutes rather than to make decisions, but holding formal meetings with parliamentary procedures tends to result in more deliberate and organized decision- making and is recommended if practical.
    It is equally important that minutes be limited to material which helps and not hurts the corporation. Resolutions should be set forth. The fact that a report was given or a discussion held on a subject should be noted. Statements made by a director or the actual content of a report or discussion, however, should generally not be included, since these references tend to be damaging more often than not. Claimants of a corporation will many times establish their case on the basis of minutes which were too detailed. It is also important to maintain a climate in which each director feels free to say anything during a board meeting and know that it will be strictly confidential and not later show up in a written record describing the board's deliberations. Generally, only formal resolutions adopted by the Board should be set forth in minutes.

    It is advisable to review any other detailed descriptions in minutes with legal counsel before completing them. Resolutions should be considered on the following subjects, among others:
    • Compensation of officers
    • Authorization of important contracts
    • Acquisition of property
    • Loans and guarantees
    • Designation of banks
    • Engagements of lawyers, accountants, and other professionals
    • Declaration of dividends
    • Approval of mergers
    • Issuance of shares
    • Sale of assets
    • Authorization to sign checks, deposit funds, and make withdrawals
    • Approval of financial statements and audit reports
    • Compliance with governmental regulations
    • Adoption of employee benefit plans
    You must make sure you follow these especially when the corporation has dealings with its officers, shareholders, or directors to demonstrate that any transactions between them and the corporation are at arms-length. While this is a lot to digest and there are more things that parent corporations must follow to avoid the corporate veil's of their subsidiary's being pierced, make sure YOU NEVER:
    • Co-mingle your personal assets with those of the corporation;
    • Divert corporate assets for your personal use;
    • Engage in activities with the intent to defraud creditors; and
    • Engage in transactions with officers, directors, and shareholders that are anything but arm's length.

  3. #3
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    Re: MLMs and Corporate Formalities

    I think I pierced my Corporate Veil - Is this Fatal? - New York Small Business Law

    I think I pierced my Corporate Veil - Is this Fatal?

    Don't go to the emergency room yet. Your awareness of something going awry in your corporation maybe the first step to recovery.
    First off, you can't really "pierce" your own corporate veil. "Piercing the corporate veil" is lawyer talk for somebody else trying to make you personally liable for your corporation's debt.
    Usually a corporation protects you from the corporation's creditors. The corporation is considered a separate entity. If the corporation enters into a contract, only the corporation is liable, not you personally, even if you are the sole shareholder, director and officer of the corporation.
    Now, this corporate separateness can sometimes lead to injustices. For this reason, courts came up with the "piercing the corporate veil" doctrine that says if someone really abuses and disrespects the corporate form to screw creditors, he or she might not be able to prevent personal liability, if the creditor can show facts and circumstances that fulfill the "piercing the corporate veil" doctrine.
    Very generally speaking, a corporate veil will stay intact, if the corporation complies with all corporate formalities, if the corporation is kept sufficiently distinct from the shareholders (no intermingling of funds and assets) and if the corporation is not just a plot to defraud creditors.
    Most likely, one small incident of non-compliance with corporate formalities or accidental co-mingling of personal funds with business funds if corrected in due course is unlikely to be enough to be the basis of a piercing the corporate veil claim and you should not loose sleep over it if it happened.
    However, it should not happen in the first place and be avoided at all cost in order to prevent any potential claims. Do not pay business expenses from your personal account, do not pay personal expenses with business funds; do not neglect to record corporate resolutions and meetings; do not forget to issue shares properly; do put adequate capital into your corporation; do not hide behind the corporate entity for your own personal shady dealings. If you are a one person corporation, the formalities and separateness may seem artificial, but you have to get used to it, in order to protect your corporation's liability shield.
    If in doubt what is and isn't o.k. under the doctrine, check with an attorney.
    **This post is for informational purposes only and does not constitute legal advice**

  4. #4
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    Re: MLMs and Corporate Formalities

    TechInsurance Small Business Center

    Piercing the Corporate Veil

    Friday, June 25, 2010 - General Insurance
    By John B. Alsterda and Christine Polk Mohr, Davis McGrath L.L.C.
    A corporation is a legal entity created by or under the authority of the laws of a state. The corporation is distinct from the individuals who comprise it. That is, a corporation is distinct from its shareholders. The term “corporate veil” generally defines the insulation provided to shareholders of a corporation from claims made against the corporate entity for its debts and other obligations arising from contracts entered into by the corporation.
    However, in some situations, a director, officer or shareholder of a corporation can be held personally liable for the actions of the corporation. Such cases include certain contractual exceptions, such as when a shareholder voluntarily agrees to guaranty a corporate obligation. In other circumstances, a statute or governmental regulation may take away a shareholder’s liability shield. For example, a shareholder who actively participates in the management of a corporation’s finances may, in some circumstances, be liable for unpaid taxes owed by the corporation.
    Another important exception is a judge-made doctrine sometimes referred to as “piercing the corporate veil.” The Unites States Supreme Court has stated that “the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when to do so would work fraud or injustice.” Courts have specifically identified various circumstances that justify piercing the corporate veil and imposing liability on individuals for obligations incurred by the corporation. Three of the most common are:
    • The defendant’s failure to maintain adequate corporate records or to follow corporate formalities
    • The commingling of funds or assets between the corporation and its shareholders
    • Treating the assets of the corporation as the defendant's own

    These scenarios tend to occur when a corporation has only one or two shareholders who also function as its officers and directors, and thereby control all of the corporation’s operations.
    Criteria for Piercing the Veil

    Some courts have employed a two-part test to determine whether to pierce the corporate veil. First, there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist. And second, adherence to the fiction of a separate corporate existence sanctions a fraud, promotes injustice, or promotes inequitable consequences.
    As one might expect, the application of this test, and others like it, is specific to the facts of each case and involves shades of gray. In determining whether the “unity of interest and ownership” criterion is met, most courts will not make a decision based on the presence or absence of a single factor, but will instead examine many factors. Historically, these have included:
    • Inadequate capitalization
    • Failure to issue stock
    • Failure to observe corporate formalities
    • Nonpayment of dividends
    • Insolvency of the debtor corporation
    • Non-functioning of the other officers or directors
    • Absence of corporate records
    • Commingling of funds
    • Diversion of assets from the corporation by or to a stockholder or other person or entity, to the detriment of creditors
    • Failure to maintain arm’s-length relationships among related entities
    • Whether the corporation is a mere facade for the operation of the dominant stockholders
    Can Broker Jones and the other scammers we have exposed survive close scrutiny on these issues? I hope Broker's vicitms will test this!


  5. #5
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    Re: MLMs and Corporate Formalities

    In East Market Street Square v. TyCorp. Pizza, 175 N.C.App. 628, 625
    S.E.2d 191 (2006), the Court easily found that the defendant owner operated his
    companies as mere instrumentalities: defendant was sole shareholder and had
    total autonomy and control of the defendant corporation and its affiliated
    corporations. Defendant completely controlled and dominated the companies so
    that they had no independent identity and no separate mind, will or existence or
    their own; he exerted control over policies, finances and business practices;
    defendant made all the decisions for all the corporations; there were no boards of
    directors to oversee defendant’s decisions; defendant was the only person to
    answer to in all business transactions; defendant company had no assets to speak
    of; and earnings of the parent corporation and each subsidiary went into a single
    pot. Of course not all of these factors must be present, but the case supplies a
    helpful laundry list of facts to search out.
    Control used to commit fraud or wrong
    This requirement is fairly broad. “When the notion of legal entity is used
    to defeat public convenience, justify wrong, protect fraud, or defend crime, the
    law will regard the corporation as an association of persons.” Henderson v.
    Security Mortgage, 273 N.C. 253, 260-61, 160 S.E.2d 39, 44-45 (1968).

  6. #6
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    Re: MLMs and Corporate Formalities

    Quote Originally Posted by Soapboxmom View Post
    Can Broker Jones and the other scammers we have exposed survive close scrutiny on these issues? I hope Broker's vicitms will test this!

    Not a chance.

    There's one very important, and often overlooked provision within the laws regarding incorporation:

    Very generally speaking, a corporate veil will stay intact, if the corporation complies with all corporate formalities, if the corporation is kept sufficiently distinct from the shareholders (no intermingling of funds and assets) and if the corporation is not just a plot to defraud creditors.
    Incorporation does NOT, in any way, protect those within the incorporated body from criminal prosecution.

    In fact, in the case of criminal activity, it is usual for the corporation AND its' owners to be charged.

    Ask Andy Bowdoin how it works.
    The only thing necessary for the triumph of evil is for good men to do nothing

  7. #7
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    Re: MLMs and Corporate Formalities

    Exceptions to the limited liability clause | start nonprofit organization

    Exceptions to the limited liability clause

    in Incorporation

    One of the most important benefit of Incorporation is that, its protects the individual members from being held personally liable for the the liabilities of the corporation.
    However in a few situations, Individuals involved with an incorporated nonprofit organization may be held personally liable for the liabilities of the organization. It is therefore imperative for you to know these exceptions before you start a non profit.
    The situations in which Individuals may be held personally liable include -
    1) Non payment of taxes/ Non filing of tax return – An organization that has obtained 501 (c) (3)tax exemption from the IRS does not have to pay taxes. However the organization is still required to file periodical tax returns.A non profit organization that has not obtained 501(c)(3) exemption must file returns as well as pay taxes to the federal and the state authorities.
    A board member or any other individual who has been entrusted with the responsibly to pay taxes by the organization is supposed to act diligently in this situation. However if the individual fails to report or pay taxes, he is held personally liable for any unpaid taxes, penalty there upon or interests payable for delay in payment or delay in filing of returns.

    2) Non compliance of other statutory requirements – An individual may also be held personally liable, if he is duly authorized by the organization to act on its behalf and still fails to comply on issues like -
    • Filing of Annual report with the Secretary of state
    • Filing of Annual report with the State Attorney general
    • Paying of employee withholding tax
    • Paying of unrelated business Income tax.......
    4)Piercing the Corporate veil- If a individual is found to be misusing the corporate veil to misappropriate funds, he/she may be held personally liable. In legal parlance, this is called – ‘Piercing the corporate veil’. The corporate veil may be pierced if the personal funds and corporate funds are so intermingled so as to deliberately misuse the limited liability clause for personal gains.....
    5) Private foundations – If an organization is classified as a private foundation (as per its IRS classification), its members can be held personally liable for failing to file federal or state tax returns or for failure to pay excise tax on certain specifically prohibited transaction. (Please refer to IRS manual on Private foundations)


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