Failure to Follow Corporate Formalities Can Result in Personal Liability (we already knew that but it helps to be reminded)

Almost every businessperson understands that forming a corporation can shield you from individual liability. However, that shield can develop enormous holes if proper corporate formalities are not observed. Recently, in Massachusetts, the sole owner of a corporation was held personally liable for a debt that her corporation had agreed to pay. Her mistake? The Commonwealth of Massachusetts had dissolved the corporation for failing to file annual reports. Although any businessperson knows how easy it can be to forget to file those reports or forget to conduct annual meetings, those formalities are critical. And, there really is no excuse. Automatic annual reminders on calendars are easy to set up. Or, there’s always an attorney willing to serve as a human reminder. Before full-scale panic sets in, though, it is very easy to “fix” lapsed formalities, and the Commonwealth gives businesses at least five years to do so. The ease it takes to fix the problem suggests that that owner’s story, of course, was more complicated. And, indeed, rather than reviving the dissolved corporation, she chose to create a new company which the court construed as an effort to avoid the corporate debt. There’s no way to be sure that she would have avoided individual liability had she remedied the lapsed formalities and revived the dissolved corporation, but it’s safe to say her chances of avoiding personal liability would have been much better.

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