Many legal hurdles under Colorado corporate law severely impact corporate CEO’s, and business partners, often find themselves involved in litigation. However, although they cannot avoid every corporate dispute, some mistakes often come from not understanding their obligations and duties under the various and complex business laws.
These mistakes are the result of a divergence between fact and fiction, between what CEO’s believe they can do and the facts at hand. Costly mistakes can impact the officer personally as well as the corporation.
Being Blinded by Prestige
Many CEO’s decide to move too quickly, blinded by the prestige or scope of an opportunity. The person needs to think through two enduring truisms. He or she should be able to leave their current role with their heads held high and confident in the future of that company.
Any short cuts in this regard would cloud achievements and prompt questions about judgment. Before you take on a new management position in a corporation, ensure that you speak to an experienced Colorado corporate lawyer to learn your legal obligations and risks associated with the position.
Not Seeking Legal Advice of a Qualified Corporate Lawyer
When you want a sounding board for legal compliance or making the right decision, a Colorado corporate law attorney can be a valuable asset. Confidence tends to reduce the felt need to share problems. Why do so when the answer is always obvious.
Great CEOs make it safe for their staff to provide candid feedback on their performance, and how to improve. They also use mentors extensively, giving time for open and honest discussions about their life journey. Poor CEO’s will generally surround themselves with people who are worse than them and seldom disagree.
Hasty Decision at Corporate Formation Stage
If the corporate form is chosen as the preferred business entity, consideration must be given concerning where to incorporate. A common misconception among many small businesses is the idea that incorporating in Nevada or Delaware offers significant advantages. For the vast majority of corporations, this is not true.
If the corporation plans to do business in Colorado, plans to maintain a sufficient presence in Colorado, or a significant number of shareholders will reside in Colorado, there is usually no reason to incorporate in any state other than Colorado, as generally Colorado corporate law will be applicable to the business, regardless of the state of incorporation.
Thus, a foreign corporation with sufficient contacts in Colorado will be deemed a quasi-foreign corporation and be required to pay Colorado filing fees (as well as fees to its state of incorporation); taxes (as well as taxes of its state of incorporation); must comply with Colorado securities law; and numerous other Colorado corporate laws.
Typically, corporations that may benefit from incorporating in another state are traded on the New York or American stock exchanges, or have been qualified for trading on NASDAQ and have at least 800 shareholders
Failure to Understand Colorado Piercing Laws -Corporate Liability for Business Debts
Colorado Corporations and LLCs are legal entities, separate and distinct from the people who create and own them (these people are called corporate shareholders or LLC members).
One of the principal advantages of forming a Colorado corporation or an LLC is that, because the corporation or LLC is considered a separate entity (unlike partnerships and sole proprietorships), the owners and managers have limited personal liability for the company’s debts.
This means that the people who own and run the corporation or LLC cannot usually be held personally responsible for the debts of the business. But, in certain situations, courts can ignore the limited liability status of a corporation or LLC and hold its officers, directors, and shareholders or members personally liable for its debts.
When this happens, it is called piercing the corporate veil. Closely held corporations and small LLCs are most likely to get their veils pierced (corporations that are owned by one or just a few people are called closely held corporations, or close corporations for short).
Not Understanding Effects of Piercing the Corporate Veil
Impact of court decisions: If a court pierces a company’s corporate veil, the owners, shareholders, or members of a corporation or Limited Liability Company can be held personally liable for corporate debts. Under Colorado piercing laws, This means creditors can go after the owner’s home, bank account, investments, and other assets to satisfy the corporate debt.
But courts will impose personal liability only on those individuals who are responsible for the corporation or LLC’s wrongful or fraudulent actions; they won’t hold innocent parties personally liable for company debts.
When Courts Will Pierce the Corporate Veil Under Colorado Corporate Law
Courts might pierce the corporate veil under Colorado corporate law, and impose personal liability on officers, directors, shareholders, or members when all of the following are true.
- There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners’ alter ego) and that the owners are personally operating the business as if the corporation or LLC didn’t exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate law or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn’t entitled to the limited liability that the corporate business structure would ordinarily provide.
- The company’s actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn’t pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn’t apply.
- The company’s creditors suffered an unjust cost. If someone who did business with the company is left with unpaid bills or an unpaid court judgment and the above factors are present, a court will try to correct this unfairness by imposing Colorado piercing laws.
Factors Courts Consider Under Colorado Piercing Laws: The most common factors that Colorado courts consider in determining whether to pierce the corporate veil are:
- whether the corporation or LLC engaged in fraudulent behavior
- whether the corporation or LLC failed to follow corporate formalities
- whether the corporation or LLC was inadequately capitalized (if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own), and
- whether one person or a small group of closely related people were in complete control of the corporation or LLC.
Some Colorado corporations and LLCs are especially vulnerable when these factors are considered, simply because of their size and business practices. Under Colorado corporate law, closely held companies are more susceptible to losing limited liability status than large, publicly traded corporations. There are several reasons for this.
Failure to Follow Colorado Corporate Law Formalities
Small corporations are less likely than their larger counterparts to observe corporate formalities, which makes them more vulnerable to a piercing of their corporate veil. To avoid trouble, it’s best to play it safe. It’s important for small corporations and LLCs to comply with the Colorado corporate law and rules governing formation and maintenance of a corporation, including:
- holding annual meetings of directors and shareholders or members
- keeping accurate, detailed records (called “minutes”) of important decisions that are made at the meetings
- adopting company bylaws, and
- making sure that officers and agents abide by those bylaws.
Commingling Corporate Assets
Small business owners may be more likely than their larger counterparts to commingle their personal assets with those of the corporation or LLC.
For example, some small business owners divert corporate assets for their own personal use by writing a check from the company account to make a payment on a personal mortgage — or by depositing a check made payable to the corporation into the owner’s personal bank account. This is called “commingling of assets.”
To avoid trouble, the corporation should maintain its own bank account and the owner should never use the company account for personal use or deposit checks payable to the company in a personal account.