Florida Corporations: Are You Observing Required Corporate Formalities?
Thankfully, Florida Statutes Section 607 clearly outlines what records must be maintained by a Florida corporation.
In Florida, as is the case throughout most states in the United States, owners of legal entities such as corporations, limited liability companies (LLCs), and Limited Liability Partnerships (LLPs) enjoy a “shield” from personal liability in most cases. This means that a shareholder of a corporation, a member of an LLC, or a limited partner in a limited liability partnership, will generally not be held liable for the debts and obligations of the entity of which they are an owner.
As with any general rule, however, there are exceptions. In the context of a creditor seeking a judgment against an insolvent or “judgment proof” corporation, the exception takes the form of what is known as “piercing the corporate veil”.
First and foremost, there is no such thing as an independent cause of action (i.e., lawsuit) for “piercing the corporate veil”. Instead, veil piercing is an equitable doctrine to recover against the owners (i.e., shareholders, members, or partners) of a corporation against which a judgment is unsatisfied.
Courts in Florida generally require that a creditor prove three elements in order to “pierce the veil” of a corporation. These elements are: (1) a lack of separateness between the corporation and its shareholder(s); (2) improper conduct in the use of the corporation by the shareholder(s); and (3) that the improper conduct was the proximate cause of the alleged loss.
As part of the first element of the test, a plaintiff must prove that the legal entity was so closely aligned with the personal interests and actions of its owner that it was not truly an independent entity. In other words, the legal entity was so indistinct from its owner that it was merely an “alter ego” of the owner.
Factors included in a court’s determination of the so-called “alter ego” scenario include:
- Ownership by a single, or just a handful of shareholders;
- Commingling of business and personal funds (i.e., no separate business bank account); and
- Failure to follow corporate formalities.
What are Corporate Formalities?
Thankfully, Florida Statutes Section 607 clearly outlines what records must be maintained by a Florida corporation. These records, if properly maintained, constitute the bulk of what is considered the “corporate formalities” required to be observed.
607.1601 Corporate Records
- A corporation shall maintain the following records:
- Its articles of incorporation, as currently in effect;
- Any notices to shareholders referred to in s. 607.0120(11)(d) specifying facts on which a filed document is dependent if such facts are not included in the articles of incorporation or otherwise available as specified in s. 607.0120(11)(d);
- Its bylaws, as currently in effect;
- All written communications within the past 3 years to shareholders generally or to shareholders of a class or series;
- Minutes of all meetings of, and records of all actions taken without a meeting by, its shareholders, its board of directors, and any board committees established under s. 607.0825;
- A list of the names and business street addresses of its current directors and officers; and
- Its most recent annual report delivered to the department under s. 607.1622.
- A corporation shall maintain all annual financial statements prepared for the corporation for its last 3 fiscal years, or such shorter period of existence, and any audit or other reports with respect to such financial statements.
- A corporation shall maintain accounting records in a form that permits the preparation of its financial statements.
- A corporation shall maintain a record of its current shareholders in alphabetical order by class or series of shares showing the address of, and the number and class or series of shares held by, each shareholder. This subsection does not require the corporation to include the electronic mail address or other electronic contact information of a shareholder in such a record.
- A corporation shall maintain the records specified in this section in a manner so that they may be available for inspection within a reasonable time.
If you have any questions about whether your Florida Corporation is properly producing and maintaining its records, please feel free to contact us; we’re here to help.