The legal theory is the business and the owner are two separate people. Without following the formalities those two “people” may be compressed into one, the owner. Every corporation or limited liability company is presumed to fit neatly under this theory, which protects the owner from the potential misdeeds of the company. However, if someone is injured by the company they can try to “pierce the corporate veil” or to prove there is no difference between the company and the owners.
The corporate veil can be seen as being created by the organizational documents. These organizational documents create the some of the formality needed to protect the business owner from the actions of the business. Other important actions to take include holding the annual meetings to report on the health of the business and vote on running the business, the use of a bank account only for the business, and the filing of tax returns separately for the business and the owners.
A business without the organizational documents will run the risk of having the corporate veil pieced. What the phrase “piercing the corporate veil” means is that the courts will disregard the designation of a corporation, instead holding that the corporation and the owners are the same person. Should an action to pierce the corporate veil be successful, the owner’s house, cars, bank accounts, and the rest are all available to the plaintiff to recover proven damages.
This is mostly an issue in small businesses or single founder businesses. It is easy not to remember to hold an annual meeting if the owner is the only individual involved. It is easy to keep track of only one bank account. It is inexpensive to hold off on having a lawyer draft the organizational documents.
The ease and the inexpensive nature of disregarding the formalities is a gamble. The gamble is that no person is injured in any way by the company, because if they are and if they pierce the corporate veil, the consequences can be severe.