Disclaimer
Clients often ask “Once they’ve established a corporation,
what is necessary to keep their corporation in compliance with
the law?” I’ve developed general information on “How
a Corporation Works” in an effort to provide some guidance
to clients on this subject. This information is intended to provide
you general information in this complex area and is neither legal
advice nor information that you can rely upon and apply to your
circumstances. This information also does not replace seeking
out and engaging competent legal advice from a professional. See
the Legal Disclaimer elsewhere in this website. With that said…here
we go.
Now that [name of corporation] has been formed and the organizational
meeting of directors has been held, it is important that you keep
in mind the following information about corporations. Limited
personal liability and the tax benefits of doing business in the
corporate forms are available only when you comply with the numerous
requirements of the corporate law. This letter is intended to
acquaint you with some of the basic requirements of corporate
operation, and to alert you to areas in which it is unsafe to
act without further legal guidance.
The benefits of corporate operation flow from the legal recognition
of the corporation as an entity separate from its individual shareholders,
directors, and officers. To enjoy these benefits, you must operate
the corporation as a separate entity and in accordance with certain
formal requirements.
It is essential that corporate and personal affairs be kept
separate. Never mix corporate and personal funds, assets, or accounts.
Do not use corporate funds or assets for personal or other noncorporate
purposes. Business should be done in the corporate name. Avoid
any indication that you are dealing in a personal capacity. The
corporate name should be used on the telephone, advertisements,
letterheads, cards, signs, etc.
When signing documents, it should always be made clear that
you are acting on behalf of the corporation. This is accomplished
by signing in the following manner:
[name of corporation]
By: ___________ , its President
By: ___________ , its Secretary
If you are also required to obligate yourselves personally, you
should add:
And , personally.
In keeping with the recognition of the corporation as a separate
legal entity, the formalities of corporate operation provide the
mechanism by which the corporation governs itself, makes decisions,
and takes action. Properly held meetings of shareholders and directors
are the key to formal operation.
To better understand who must meet and when meetings are required,
you should become familiar with the different capacities - shareholder,
director, and officer - in which you will be acting at different
times.
As shareholders, you own the corporation. Shareholders do not
own the business; the corporation owns the business - all assets
and all funds. Shareholder control of the corporation extends
only to the election and removal of directors, amendment of the
articles of incorporation and bylaws, and a few other major actions,
such as dissolution, merger, sale of all the corporate assets,
the making of certain loans, and the creation of new stock. These
actions will be valid only if authorized by the shareholders acting
as shareholders, in a properly held shareholders' meeting.
As directors, you are the managers of the corporation. You make
all major business decisions, such as the hiring and firing of
officers, compensation of employees, payment of dividends to shareholders,
contracting with other businesses, loaning or borrowing money,
initiation of new ventures, purchase of new equipment, etc. These
decisions are expressed in the form of resolutions adopted by
a majority vote in a directors' meeting, and recorded in the corporate
minutes. Your authority is limited by law, by the articles of
incorporation, and by the bylaws, but you may amend the bylaws.
Within areas over which directors have control, only those acts
authorized by resolution will be considered acts of the corporation.
As officers, you are employees of the corporation. You conduct
the everyday business of the corporation under the direction of
the board of directors. Your acts are the acts of the corporation
so long as you act within the authority given by the articles
of incorporation, the bylaws, and the resolutions of the board
of directors.
In closely held corporations such as yours, when the same people
act in more than one of these capacities, the practical necessity
of keeping roles straight is very important. First, the courts
consider observance of the formalities as important evidence in
deciding whether or not the corporation has been operated as a
separate entity. Second, the formalities are often the source
of authority for those who act on behalf of the corporation. Officers,
directors, and employees who act without authority (that is, without
the necessary approval of the shareholders or the directors, properly
made and recorded in the corporate minutes) may be personally
liable for their acts.
Oversights in authorization can often be corrected by later
ratification of actions already taken. The best practice, however,
is to avoid problems by holding regular and frequent meetings
of the board of directors. Also, for tax purposes many actions
must be taken in a timely manner or they cannot be taken at all.
Shareholder meetings should be held at least once a year for election
of directors, and at other times as the necessity for shareholder
approval of specific actions may arise.
Legally, a meeting that does not comply with the bylaws is no
meeting at all. No action taken at an improperly conducted meeting
will be effective to accomplish its purpose. For this reason,
you should become familiar with the bylaw provisions governing
meetings (article II for shareholders; article III for directors).
A written record that shows that a meeting was properly held
and that recites the actions taken at the meeting must be prepared.
These are the functions of the corporate minutes. The minutes
of the organizational meeting illustrate the proper form.
The minutes must show that a quorum was present, and that proper
notice was given to everyone involved. In addition to containing
the substance of resolutions passed, the minutes should also list
the names of those voting for and against any resolution that
is not passed unanimously.
A device for facilitating the meeting process is a waiver of
notice. Technical problems of giving proper notice of meetings
can be avoided by routinely obtaining a waiver of notice from
all shareholders or directors, as appropriate. The waiver utilized
in the organizational meeting may be used as an example.
There is a substitute for the meeting process when actual meetings
are inconvenient, or when a consensus can be reached informally.
Unanimous written consent of all shareholders or all directors
will serve as the legal equivalent of a meeting. These written
consent resolutions would read as follows:
MEMORANDUM OF ACTION OF [DIRECTORS] [SHAREHOLDERS]
OF
[name of corporation]
In accordance with the provisions of [your state law], and pursuant
to the unanimous consent of all [members of the board of directors]
[shareholders] of [name of corporation], an [your state] corporation,
the following actions were taken without a formal meeting:
[List the actions taken]
DATED this day of , 200 .
[Shareholders] [Directors]
The written consent resolutions, waivers of notice, proofs of
notice, and minutes of actual meetings must all be kept in the
corporate minute book. We suggest that the minute book be reviewed
annually by your corporate attorney.
You should also be aware of restrictions on the manner in which
directors conduct the corporation' affairs. Directors hold a great
deal of power within the corporate structure. In order to protect
others, both within and without the corporation, from abuse of
this power, the law places certain constraints on directors' actions.
Directors are held to a fiduciary standard of loyalty to the
corporation. This means that in the capacity of director, and
also as an individual, the director must act in the best interest
of the corporation. Any conflict between the director's personal
interest and the corporation's interest must be resolved in favor
of the corporation. For example, a director may not individually
pursue a new business opportunity if the opportunity could be
pursued by the corporation and is within the corporation's line
of business. Of course, a director cannot engage in a business
that competes with the corporation.
All dealings between a director and the corporation must be
approved, after full disclosure, by an independent vote of a majority
of the other directors, or by the shareholders (see bylaws, article
X, section 2). Do not enter into any agreement with the corporation,
sell to or buy from, rent to or rent from, or otherwise deal with
the corporation, without first consulting us.
The corporation may make loans to directors only with formal
approval by the holders of three-fourths of all shares. Directors
and shareholders may make loans to the corporation, but these
loans may, in some circumstances, be considered capital contributions.
Again, consult us before you take any action.
The following acts are specifically prohibited by law, and will
result in personal liability for directors:
1.Voting to pay dividends in violation of the articles of incorporation
or state law.
2.Voting to purchase the corporation's own shares beyond amounts
authorized by state law.
3.Voting to distribute assets during liquidation before payment
of indebtedness.
4.Voting to make a corporate loan to a director without the approval
of the holders of three-fourths of all shares.
Any director present at a meeting where one of these votes is
taken will be treated as having voted in favor of the action,
unless a dissent is entered in the minutes, or a written dissent
is filed with the secretary of the meeting before adjournment,
or filed by registered mail immediately after the meeting.
The directors are responsible for the timely filing of all tax
returns and other required reports. The failure to file tax returns
and to pay the taxes due may make the directors personally liable
for the payment of some taxes. Directors may also be personally
liable if the corporation fails to pay wages or withhold employee
income taxes.
The restrictions and obligations described above are also generally
applicable to the officers of the corporation.
A number of other areas require legal advice. Please consult
us whenever you are considering:
1.Issuing new stock or debt instruments.
2.Purchasing stock from a shareholder.
3.Doing business in other states or counties.
4.Amending the Articles of Incorporation.
5.Dissolving or merging the corporation.
6.Selling the majority of the corporation's assets outside of
the ordinary course of business.
If you have any questions regarding the above information or
concerning other aspects of your corporation, do not hesitate
to call your corporate attorney.
