Matthew Fredrick

October 13, 2017

Summary: Carla, it would appear that you have a good start on incorporating but there are some
things that we need to take care of before any more action is taken. I would recommend that you
not take any more actions on behalf of the corporation that would be enforceable. We want to
make sure that any terms you agree to offer you limited liability. Once we sit down and talk
through these issues we should be able to get your corporation up and running.
Liability associated with planning and organizing operations
o Liability for previous agreements
Line of credit (Use for personal cards) The bank likely already has
documents put together in your name. You should reach out to them and
make sure that they are aware that they would be dealing with the
corporation. If you need to form the agreement now there should be a clause
in the agreement that releases you from liability after the corporation comes
into existence. We may need to structure this agreement so that the credit is
available upon the existence of the corporation. There can be some issues
when a corporation comes into existence with insufficient financial
resources. I will examine whether the contingent line of credit will fulfill
this financing requirement.
Do you have any other assets or resources that will belong to the
corporation upon its formation?
Furniture and equipment This agreement was made between you as a
person and the vendor. This means that in the event there is an issue with
payment the vendor will try to collect the debt from you. We can contact the
vendor and see if they are willing to release you from liability when the
corporation comes into existence.
Did you sign these agreements personally or on behalf of the
corporation?
Have you paid money for the items?
Did you inform the vendor that you intend to form a corporation?
o Liability for future actions prior to incorporation
Lease The lease will also need to be in the name of the corporation. As
with the line of credit an agreement could be added to the contract as is to
release you from liability.
Personal cards for expenses You need to establish a separate business
account. The overlap of personal and business resources significantly
increases the risk of losing limited liability protections. Additionally, it is
not always easy to get reimbursed from the corporation.
How much money have you spent or committed thus far to the
corporation?
Construction As discussed with other elements any construction
agreements should be in the name of the corporation. Your signature on
these documents should clearly indicate your role on behalf of the
corporation.
o Liability in the event the corporation never comes into existence
Personal liability If the corporation is not finalized then you very well
could be liable for agreements that you have already entered. From my
reading it would appear the only agreement finalized by now is the furniture
 Matthew Fredrick
October 13, 2017
and equipment. Prior to signing any other agreements I would be happy to
review your contracts to ensure that we are able to offer you the best
protection.
Would you be able to provide a full list of current obligations?
Best faith efforts Many of the protections offered prior to formation of a
corporation require that you make your best efforts to get the corporation
established. I mention this only because these efforts relate to protection
from liability. I am confident that we will be able to get everything taken
care of but I wanted to make sure you were aware of this. If you have any
questions about this I would be happy to cover it with you in person.
Piercing the Corporate Veil (Removing limited liability protections)
o Corporate/personal overlap It is important that you do not continue to use
personal accounts in the operation of the business. It is okay to contribute your
money to the operations of the corporation but that must be done in a formal
manner that is firewalled from personal operations. As discussed above this will be
one of the main things courts will look to when determining whether to remove
limited liability protections. The financial overlap and deals done in your name
would be strong factors showing a corporate-personal overlap.
o Formalities It is important to follow corporate formalities when operating.
Following formalities tells everyone who interacts with the corporation that you are
operating as the corporate entity and not in your personal capacity. This is a big
part of limited liability. Following these formalities also helps to make sure the
business is making prudent decisions.
Corporate governance You will need to operate the corporation in a
formal structure. This includes electing a board of directors to vote on
decisions. Directors are elected on an annual basis. We can discuss the
specific steps to put this into action. The questions below should serve as a
starting point for our conversation
Do you have an idea of how many directors you would like to have?
Ratification of deals Once a board of directions has been established they
will need to ratify any agreements made prior the official formation of the
corporation. They may also need to ratify the line of credit to decide
whether to encumber the organization with that much debt.
Receipt of money As discussed above the corporation may need to
formally agree to the line of credit because of the size of the debt. Further,
the board would need to sign off on any disbursements to you. This is
regardless of whether the money in order to cover expenses you fronted the
company. Again, this speaks to the overlap of the person and the company
and issues that arise when there is too much overlap.
Taxes
o Cash income/personal account It is important that you record all taxes in a lawful
manner. Failing to properly account to the IRS for all income is illegal and would
subject you to serious penalties. There are still advantages that come with a
business that receives cash instead of credit card payments. Credit card processing
companies often charge approximately 2%. Receiving cash payments avoids this
charge and gets you a large amount of money over time.