Businesses and individuals often set up corporations because the structure has many unique benefits—one of which is limited liability. A corporation is a completely separate legal entity, which means that it files its own taxes, it has its own funds, and it can hold assets.
In general, you, as a corporation owner, will not be liable for the actions of the corporation. However, there are exceptions to this rule.
Keeping the assets of the corporation and your personal assets separate will help significantly with limiting liability. However, in order to fully take advantage of the many benefits of becoming a corporation, you must follow certain formalities. Even one-person corporations must follow corporate formalities, or they put their personal assets at risk.
Every state has slightly different requirements for corporations. You must know and understand the actions you should regularly take to keep up with laws and regulations related to your corporation. A failure to do so can result in limited or no liability protection, which is often called "piercing the corporate veil."
Essentially, when someone attempts to pierce the corporate veil, they are arguing that your corporation is really just an extension of you; it is not acting as a separate legal entity. When someone successfully pierces the corporate veil, they can get a judgment against your personal assets in addition to the company funds and resources.
To maintain a corporation’s status as a separate legal entity, you must engage in certain corporate formalities on a regular basis. These usually involve recordkeeping, but meetings and performing certain duties for the corporation are important as well. Some of the corporate formalities in your state may include the following actions:
You should also take great care to follow the rules as they are set out in the formal corporate documents, including the articles of incorporation and the bylaws. If you simply ignore these documents, it will be easier for a creditor or other party to argue that your corporation is really just an extension of you instead of a separate legal entity.
Be sure to change your corporate documents if they do not reflect how the corporation truly functions. You can do this through an amendment process that involves drafting corporate resolutions at a regular or special meeting.
State laws and a corporation’s bylaws will dictate specific meeting requirements for corporations. In general, however, most corporations are required to have at least one shareholders' meeting per year. Corporations are also required to prepare and retain minutes of these meeting. There is often a legally based recordkeeping requirement for meeting minutes, but the exact length of time will vary by state.
You are required to give individuals notice of the meeting before it occurs. Notice should go out to owners (or shareholders), officers, or employees. The notice of meeting will indicate:
States often have specific notice requirements regarding timing. Generally, notices should be provided more than ten days, but less than 60 days before a meeting is set to occur.
Your shareholders also have the option to waive the specific notice of the meeting requirements. Asking your shareholders to sign this waiver allows you to conduct meetings on short notice. A waiver of notice is necessary if proper notice cannot be provided in time for the meeting. Otherwise, any actions that are taken at the meeting could be declared legally invalid for failing to meet notice requirements.
Every meeting should also have formal minutes taken. Minutes are essentially notes that you take of everything that happens at the meeting. Minutes are much more important than the average notes, however. They serve as the official record of the meeting for the corporation. Meeting minutes are a useful tool to prove what happened at a meeting or settle disputes down the road about voting or decisions that were made.
Generally speaking, meeting minutes will include the following information in every entry:
State laws generally do not have formal requirements about the information the minutes must include. Instead, the minutes simply have to exist. Internal documents, such as bylaws, may require that certain information be contained in the minutes, so it is important to check for these rules and follow them closely.
Officers, shareholders, and directors can demand a copy of the meeting minutes at any time. If you do not provide these minutes when requested, they may involve the court to compel you to produce them. It is important to keep the meeting minutes as required so you can produce them if requested.
In small to mid-sized businesses, it is not uncommon for the shareholders of a corporation to also be the board of directors. A valid, legal corporation is required to have both groups. If this is the case for your corporation, you can often combine the annual meeting requirements for both of these groups in the same session. Just be sure that your meeting minutes reflect that the meeting is considered a joint meeting of the shareholders and the board of directors.
Although attending a shareholders' meeting or board of directors' meeting is technically not required, the group must have a quorum present in order to make any decisions or vote. A "quorum" is the minimum number of voting members that must be present to conduct business. Businesses often set out their own definition of what a quorum may be in their bylaws. Nonetheless, a quorum is usually a majority of the voting members.
It is a good idea to define what a quorum means for your corporation in terms of the total percentage of members. However, businesses do not always do this, and they can define what a quorum may be at each meeting if they so choose. If a business chooses to have this type of varying quorum, it should be set out in the bylaws as well.
If you do not have enough members at your meeting, you may need to adjourn the meeting for the day and reschedule for a time when more members can be present.
In some circumstances, you may be able to take corporate action without actually holding a meeting. If the shareholders consent in writing to the proposed action, then you may not need to hold a meeting as long as at least the required number of voting members indicate their consent. The written consent should be retained in place of the meeting minutes.
State laws will vary on this issue, so if you are unsure of whether this is an option for you, it is better to hold a meeting than not.
Not every corporation will have more than one shareholder. In fact, small to mid-size businesses that choose to incorporate often only have one or two shareholders. It may seem silly to follow notice requirements and hold corporate meetings with only one or two owners, but it is still required to maintain your corporate status.
Instead of holding a meeting with an empty room, however, you can simply create meeting minutes to show that a meeting was “held.” S corporations will commonly only have one shareholder, so they may need to follow this type of informal procedure. It is important to have these minutes because they will help protect you from liability, and they may be required in the event of an IRS or state taxing authority audit.
In the minutes of a single-shareholder meeting, you should:
There is generally no need to provide notice to yourself, but if you have at least one other shareholder, you will need to follow the formal notice requirements.
Usually, there are no requirements for limited liability companies to hold annual meetings like corporations. However, the internal organizational documents, such as the LLC operating agreement, may require that the members hold regular meetings. Nonetheless, there is less risk that you will lose your liability protection if you fail to hold a meeting as specified in the formation documents—unless the formation documents state otherwise.
Like a corporation, however, there is still a risk that a creditor or other individual could "pierce the corporate veil" if you fail to follow the formalities as laid out in your formation documents, including requirements regarding regular meetings. For this reason, even though holding meetings is not technically required for LLCs, it is still a good practice.
Corporate formalities can be an annoyance, but they are relatively straightforward. LegalNature has the forms you need to help keep your corporation organized and in compliance with state laws. Our library of legal documents can be extremely helpful for a business that is just getting started or wants to be sure it remains compliant with its legal requirements. Be sure to also keep an eye on our articles page for helpful tips and information for your business.
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