The regular observance of corporate formalities is an important aspect of maintaining the protections and advantages of being incorporated, not the least of which is the protection of shareholders against personal liability for the financial obligations of the corporation.

Three of the most important areas of corporate formalities are shareholder decision making, director decision making, and separation of corporate assets from personal assets. Territorial tax returns, employment tax returns, and Annual Reports, and similar filings are also required, depending on where the corporation is incorporated and qualified to do business.
Shareholders should take action to elect the board of directors of the corporation annually or otherwise, in accordance with the corporation’s bylaws. In addition, certain specified fundamental changes in the corporation require the consent or approval of the shareholders, including, but not limited to:
1. Amendment of the Articles of Incorporation;
2. Sale of all or substantially all of the assets of the corporation;
3. Merger or consolidation of the corporation with or into any other corporation; and
4. Winding up and dissolution of the corporation.
Matters of more general operating policy should be considered and authorized by the company’s board of directors. Although there is no statutory requirement with respect to how frequently the board of directors should act, it is typical that the board meets quarterly and calls special meetings in which action is required before the next regular meeting. Matters that are generally appropriate for director action include the following:
1. Annual appointment of officers, setting of salaries, and declaration of bonuses;
2. Appointment of board committees, if any;
3. Corporate borrowing and the giving of security in connection therewith;
4. Contracts for the acquisition or lease of significant assets or services or the disposition of assets, or for the rendition of services outside the ordinary course of the business of the corporation;
5. Policy decisions with respect to the corporation’s operating budget;
6. The adoption of pension, profit-sharing, bonus, and other employee benefit plans;
7. The declaration of dividends or the redemption of shares;
8. Amendment of the bylaws;
9. Review of financial statements of the corporation;
10. Appointment of auditors, if any; and
11. Any action that requires a shareholder vote.
The danger in not adhering to corporate formalities is that creditors may be able to “pierce the corporate veil”, exposing shareholders to liability beyond their capital contributions to the corporation. Following corporate formalities will ensure that shareholders are well protected and maintain their limited liability.

Attorney Daniel J. Gravel is Chair of the Corporate and Tax Practice Group at BoltNagi PC. BoltNagi PC is a full service business law firm in St. Thomas, Virgin Islands.