The consequences of failing to comply with corporate or company formalities can be severe. Failing to comply with formalities can raise many problems for owners and shareholders alike. In order to maintain limited liability and prevent legal complications, business representatives must be fully aware of their duties and obligations, and take caution to strictly abide by them.
Piercing the Corporate Veil
Corporations and limited liability companies shield shareholders and members from personal liability. However, when these businesses fail to comply with certain formalities, courts may decide to remove this protection by allowing creditors to “pierce the corporate veil.” Any number of factors can persuade courts to allow the corporate veil to be pierced, including inadequate record keeping, intermingling personal and business assets and failing to pay dividends. Once the corporate veil is pierced, shareholders or members can become liable for the debts and misdeeds of the corporation.
Confusion Among Shareholders and Members
A business without clear direction and organization is almost certain to encounter complications. Failing to follow corporate or company formalities is a surefire way for businesses to create confusion among shareholders and members. Shareholders and members must know that reliable mechanisms are in place to maintain the corporation or company’s smooth operation. Only by adhering to formalities can businesses provide shareholders and members with confidence that the corporation is under proper supervision and government.
Administrative Dissolution of a Corporation
Perhaps the most extreme consequence for failing to observe corporate or company formalities is administrative dissolution. The Arizona Corporation Commission has authority to administratively dissolve a corporation or company for a number of reasons. The following reasons may be enough for the commission to dissolve an Arizona company or corporation:
- Failure to amend articles of organization or incorporation
- Failure to make publication or affidavit of publication.
- Failure to appoint or maintain a statutory agent.
- Failure of the statutory agent to respond to interrogatories.
- Failure to pay fines or penalties.
- Failure to timely file annual reports.
