One of the biggest decisions you're going to make as an entrepreneur is deciding the right form for your business. Let's talk about corporations in this lesson, we're going to talk about what is a corporation and the different types of corporations the requirements that are necessary to establish a corporation. And then we'll discuss a legal concept called the Corporate Veil, which is very important to keep in mind when operating your business as a corporation. What is the corporation? A corporation is an independent legal entity that owned by shareholders and it's recognized under the law as a legal person. So for purposes of tax treatment a corporation can be taxed separately. It can buy property, it can sell property can create a bank account it can essentially act as its own individual for purposes of the law. And there are two primary forms of a corporation, at least under US Law. That is the C Corp or the C Corporation. We call it the C Corporation because it's taxed under sub chapter C of the Internal Revenue Code, that the tax code in the US. And secondly, you have what we call an S Corporation. An S Corporation actually requires a special step that we call an election unless the corporation decides and elects to be treated as an S Corporation, the default corporation status is a C Corporation. So let's talk a little bit about an S Corporation. First of all, the election, in order to be treated as an S Corporation, a corporation has to affirmatively elect to be treated as such. And by electing to be treated as an S Corporation, you gain the benefit of not having the corporation tax as a separate entity. An S Corporation has its profits and losses for tax purposes passed through to its individual shareholders and the shareholders would pay individual taxes on those profits or losses to the extent of their ownership interests in the corporation. There are many requirements for corporation, and they're pretty onerous corporations must abide by these requirements in order to achieve the benefits of the corporation, namely, shielding the individual shareholders from personal liability for the activities of the corporation. First of all, as a corporation, most states require that you have a Board of Directors. Board of Directors is a group of individuals who are responsible for the management of the corporation they controlled the corporation. The CEO of the corporation actually reports to the Board of Directors. Also, it's also required for a corporation that you take care of the day to day management of the corporation. And the CEO and employees of the corporation are responsible for the day to day management, and they report those activities up to the Board of Directors. There are also very stringent statutory rules for corporations that don't exist with other forms of business. For example, corporations must have annual meetings where you go over the pluses and minuses of the corporation. You go over the objectives for the corporation you pass board resolutions. You must also keep very detailed notes on minutes and decisions of the board board resolutions. You must also keep very copious records of for tax purposes what taxes have been collected by the corporation have been paid on behalf of the corporation, etcetera. And also in terms of bookkeeping, corporations, bank accounts and other accounts, you must keep very detailed records of those kind of financial transactions on behalf of the corporation. So, as you can imagine, all of these requirements are quite onerous and very different from what's required for other forms of business, like a partnership or a limited light, a limited liability company. But the corporation has good benefits in terms of shielding its shareholders from our ability. Also, it's an attractive form of business for large sources of capital funding for example, venture capitals usually look for corporation as the entity of choice. Now, let's talk about Corporate Veil. So as we've said, one of the benefits of incorporating your business is the idea that you could shield your shareholders from personal liability for actions that arise from conduct of the corporation. So let's take, for example, a plaintiff who's suing the corporation for personal injury, one of your employees injured a plaintiff in connection with doing his or her job. Typically because of the way a corporation is set up the law is such that it puts a veil between that plaintiff in the lawsuit and the individual shareholders, personal assets, that veil is what we call the Corporate Veil. This prevents the plaintiff from going after the individual personal assets of the shareholders. Instead, the plaintiff can only pursue its lawsuit against the assets of the corporation, and there is a concept of piercing the Corporate Veil, and this is where a court may disregard the veil. The court may disregard the corporate form and the benefits of incorporating your corporation to allow the plaintiff to go after the individual assets of the shareholders. Now, as you can imagine, one of the biggest benefits of incorporating your business is to make sure that that veil stays up. And so let's talk about ways to avoid allowing the court to pierce the Corporate Veil. There are two big reasons why a court would decide to disregard the corporate form. First is called alter ego, and this is where the corporation is essentially a second face for shareholders. The shareholders are using the corporate form to actually conduct personal business. We oftentimes see this when bank accounts or co mingled or assets of the shareholders are used for, for corporate purposes or vice versa, like corporate assets are used to further personal, business for shareholders. When this occurs, it's essentially the corporate form is another face of the shareholders. and in the event, there's a creditor who has an action against the corporation or plaintiff in a lawsuit who wants to go after the corporation. If these types of co mingling and mixing assets of personal assets of shareholders with corporate assets when this activity is happening, a court is more likely to say, hey, look, you're using the corporate, the corporation as a personal business anyway. So why shouldn't this credit or be able to go after your personal assets? Why shouldn't the plaintiff in this lawsuit go after your personal assets? And in those instances, the court will pierce the Corporate Veil or disregard the corporate forum to allow the personal assets of the shareholders to satisfy the claim. The second way a court may disregard the corporate form is when the corporation is being used for illegal activity. Whenever you're using the corporate forum to pursue illegal activity, the court will say corporation can exist. We're not going to let the shareholders hide behind the corporation to avoid criminal liability. So, if you ever have questions about whether potential activity that the corporation is engaging in is or is it legal, you should immediately seek the advice of an experienced lawyer to ensure that you're not setting yourself up for a situation where all the benefits of incorporating your business can be disregarded by a court. The best practices on avoiding this is one before corporation decides to take any action, make sure you obtain and document board authorization for that action. Whether it's instituting a trade name for your business or opening a bank account or signing an agreement with a big contractor or vendor, any action that the corporation is going to take, any particularly major actions on behalf of the corporation. You should obtain and document that you had a board authorization to do so. This ensures that it's the action is not a personal action, it's actually a corporate action that's taking place secondly, and and this is one that we see happen a lot. make sure you maintain separate bank accounts for your corporate funds and the shareholders personal funds. It's it's it's particularly the early stages of developing your business. Oftentimes you're using your own money to get things started to seed, seed capital for your early operations. But as you're thinking through the long term success of your business, you want to be sure to take extreme measures to keep your personal assets separate from the corporate assets. Now. Also, you want to maintain proper records from your personal assets in your corporate assets, make sure you have proper documentation for your bank transactions, proper documentation on minutes from your board meetings, all your bookkeeping activities for the corporation. Make sure you maintain them separately. And you maintain them that you have proper documentations for those for those activities. And then finally, whenever you're engaging in and agreements With 3rd parties, be sure to sign all agreements in the name of the corporation. So if you're the CEO as the family of the corporation, you should sign the agreement, not in your personal capacity, you should sign the agreement with your name, your title of the corporation and the name of the corporation. so that it's very clear that this agreement is between this third party and the corporation, not with you as an individual. And then just one other point I'll make in terms of best practices for avoiding this concept of piercing the Corporate Veil is to be sure that you properly fund your corporation. Under capitalization is a is another red flag for courts when they're looking at whether it appears the Corporate Veil because it signifies that hey, you didn't put enough money in this business. So, it's only fair that we find a way for this creditor or this plaintiff in a lawsuit to be satisfied for the wrong that had been done. And so be sure that you provide enough funding for your corporation for for the operations that the corporation is engaging in just to wrap up corporations provide tax and personal liability advantages for shareholders. If you have a C Corporation, the corporation is taxed as a separate entity. If you have an S Corporation, taxes actually passed through to the shareholders for the individual tax returns. In terms of personal liability, the corporate form shields shareholders from personal liability unless there's a situation where a court would pierce the Corporate Veil and whole shareholders personally liable. If you're going to have a corporation, you must comply with very strict statutory rules around having a Board of Directors and having annual meetings and keeping documentation on minutes from board meetings, having proper board authorization for certain corporate acts, Keeping good records of your of your taxes and your your your bank accounts. All these very strict statutory rules are required for the corporate form, and you want to be sure to adhere to those rules so that you don't run into a situation where a court would would disregard the corporate form. And that is the primary risk that you that you have with the corporate form, the failure to maintain the corporation as a separate entity. Following those very strict rules, it can result in personal liability for the shareholders.