A Corporation is the most common entity structure in the U.S. for tech startups. It is a legal entity that exists separately from its stockholders, directors, officers, employees and other constituents or stakeholders. As a legal “person” in the eyes of the law, a corporation can generate revenue, incur taxes and be held legally liable for its actions. For startup founders, one of the key attractions of doing business as a corporation is the promise of a limited liability shield that insulates personal assets from becoming subject to the liabilities of the Company.
However, incorporation alone does not guarantee the protection of limited liability. To be treated as a separate entity, certain rules and precautions, referred to as “corporate formalities,” must be observed to uphold the legal distinction between a corporation and its stakeholders. This applies even when a corporation only has a single owner, as is often the case with early-stage startups. While specific requirements can vary depending on the state of incorporation, failure to comply with necessary obligations can result in losing the limited liability protection, known as “piercing the corporate veil,” and result in personal liability for individuals involved in the Company’s decision-making process.