Importance of Corporate Records
Most companies conduct their businesses through a legal entity such as a corporation, limited liability company or limited partnership. Why? The primary purpose of doing business through one of these entities is to insulate owners from liability arising out of company activities. For example, if someone is injured as a result of a company activity or product or on its premises, presumably the owners are shielded from personal liability. Nevertheless, the injured person could seek to reach the owners’ personal assets by attempting to “pierce the corporate veil” of the company. Likewise, a plaintiff in a contract dispute can also seek an owner’s personal assets in this manner.
In determining whether to pierce the corporate veil, a court generally will not rest its decision on a single factor, but will examine many factors, including: (1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency; (6) nonfunctioning of officers or directors; (7) absence of corporate records (8) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm’s-length relationships among related entities; and (11) whether, in fact, the corporation is a mere facade for the operation of the majority owner.
Consequently, it is very important for a company to observe formalities and keep records so that their lack of deficiency cannot be used as a factor in piercing the corporate veil. Aside from potential tort or contract liability, here are a couple other types of problems that can occur by not following corporate formalities and failing to document the records properly.
1. Loans. Owners of closely held companies sometimes infuse or take out money into and from their companies. The question becomes, is the transaction a loan or is it a constructive dividend? Owners receiving loans must properly record the loan. If the loan is not properly documented and recorded in the minutes, the loan may be deemed as a constructive dividend. What does this mean for the owner? The owner may be forced to pay ordinary income taxes on income that would otherwise be nontaxable.
2. Company use of Personal Possessions. Many owners of closely-held companies intermingle their own possessions into their companies. The line between what is company owned and what is personally own may become blurred and indistinguishable from each other. Vehicles, tools, equipment, and the like commonly used in company and personal settings are prone to this problem. Shareholders giving loans to or borrowing equipment from the corporation must properly document and record in the minutes the ownership of the equipment. If the loan or equipment is not properly recorded here, the loan or property may be interpreted as property of the company during litigation or sale.
At a minimum, every corporation and LLC should observe the following formalities and keep the following records (samples of many of these records are attached):
1. Annual Directors’ Meetings.Occur once yearly on an established date. At the meetings directors review key decisions, financial data, etc., that have already occurred, and elect officers for the coming year.
2. Special Meetings of Directors.Can be held at any time during the year. Directors are called to approve expenditures and decisions before they occur. The following matters should have resolutions adopted either at a meeting of the directors or by unanimous consent in lieu of a meeting.
A. Lease or purchase of real estate;
B. Qualification of company to do business in a foreign jurisdiction;
C. Salaries of officers;
D. Bonding of officers;
E. Options and special compensation;
F. Borrowing money and issuance of debt;
G. Any registrations;
H. Patent and trademark registrations;
I. Appointment of agents and representatives;
J. Adoption of assumed name;
K. Setting the fiscal year; and
L. Establishing committees.
Haphazard records, incomplete records, or no records at all will not suffice. The following is a list of some of the requirements for corporate records:
A. Notices – Notices are sent out to directors, shareholders, and officers as to when and where the meetings will be held.
B. Waiver – Generally, everyone knows of the first meeting, therefore notice is usually waived. Notice also can be waived in subsequent meetings.
i. Establishes written record of the event.
ii. Possibility exists that the minutes may have to be presented to a bank, court, or auditor.
iii. Includes resolutions.
i. Can be within or outside the state of incorporation. Those attending by internet and phone can participate and interact and be counted as in attendance.
ii. Many companies have meetings at their offices as a matter of convenience.
i. Annual meeting is established in by-laws.
ii. Special meeting dates are established as needed.
F. Reasons to update promptly
i. Records written years after the fact can be incomplete.
ii. Records that are incomplete due to lack of memory, lack of writing or lack of effort are the same as an absence of records in legal effect.
iii. Incomplete Records can create large liabilities for the stakeholders involved.
________________ Forms ________________
Subchapter S and Subchapter C Corporations
[NAME OF CORPORATION] NOTICE OF
[ANNUAL] [SPECIAL] MEETING OF SHAREHOLDERS
Notice is hereby given that, pursuant to a call of ____________________, [an annual] [a special] meeting of shareholders of [name of corporation] will be held on ____________, 20__, at _____ [a.m.] [p.m.], at [location].
The purposes of the meeting are
1. To elect [number] members of the Board of Directors [(applicable to annual meeting)];
2. [any other purposes].
Only shareholders of record at the close of business on ____________, 20__, are entitled to notice of, and to vote at, the meeting.
By order of [person issuing notice]. _______________________________________
[typed name and office]
WAIVER OF NOTICE OF [ANNUAL/SPECIAL] MEETING
OF THE SHAREHOLDERS OF [NAME OF CORPORATION]
The undersigned as a shareholder of (name of corporation), being entitled to vote at meetings of shareholders of the Corporation, does hereby waive written notice of the (annual) (special) meeting of the shareholders of the Corporation (held) (to be held) on (day of week), ______________, 20___, at (a.m.) (p.m.), at (location) for the purpose of (business transacted or to be transacted at the meeting).
Number of shares held: ___________
[NAME OF CORPORATION]
MINUTES OF SHAREHOLDERS’ (ANNUAL/SPECIAL) MEETING
[The annual] [A special] meeting of the shareholders of [name of corporation], an __________(state) corporation (Corporation), was held at [location], on [day of week], ____________, 20__, at _____ [a.m.] [p.m.].
The meeting was called in the manner prescribed by law and the bylaws of the Corporation, and notice was mailed to each shareholder entitled to notice on ____________, 20__. The call, a copy of the notice and all waivers thereto, and the Secretary’s declaration that such notice was properly served are attached to these minutes.
The meeting was called to order by ____________________, President of the Corporation, who served as Chair of the meeting. ____________________, Secretary of the Corporation, served as Secretary of the meeting and recorded the minutes.
The Chair announced that there was a quorum present. The following were present: Name Number of Shares
On motion duly made and carried, the minutes of the [annual] [special] meeting held on ____________, 20__, were unanimously approved by voice vote, [after the reading of the minutes was dispensed with] [after the minutes were read by the Secretary].
[NOTE: If annual meeting and if an annual report is presented, add the following statement.] The Chair presented to the meeting the annual report of the Corporation for the year ended ____________, 20__, and reviewed that report. A motion was duly made and carried waiving the reading of the report, and a copy of it was ordered attached to the minutes of this meeting. Upon motion duly made and carried, it was resolved to dispense with the reading of the Notice of the Meeting and the Affidavit of Mailing of the Notice, and these were ordered filed with the minutes of the meeting.
The Chair then called for nominations for Directors to serve until the next annual meeting or until their successors are elected and take office. The following names were placed in nomination by ____________________: [names of nominees].
The Chair announced the first item of formal business was the election of [number] members of the Board of Directors. After discussion of the nominees, voting was conducted and the following persons were elected as Directors: ____________________________________.
The following resolutions were then presented to the meeting, and the shareholders took the following actions: [set forth the exact text of each resolution in the order presented to the meeting along with the votes cast for and against each; consider adding a discussion of the substance of the resolution, especially if it relates to a complex, material transaction, such as a merger or sale or an action relating to pension plans for employees].
RESOLVED, That all purchases, contracts, contributions, compensations, acts, decisions proceedings, elections, and appointments by the Board of Directors since the Annual Meeting of Stockholders of the Corporation on ______(date of last meeting) and all matters referred to the in the Annual Report to Stockholders for the fiscal year ending _____________(date of last Annual report to stockholders), be and the same hereby are approved and ratified; and
[NOTE: Counsel should consider adding the following two resolutions but only if they are applicable and if their effect is truly intended by the shareholders.]
FURTHER RESOLVED, that the officers of the Corporation, and each of them individually, be, and each of them hereby is, authorized, empowered, and directed, in the name and on behalf of the Corporation, to execute and deliver such documents and to do or to cause to be done all such acts as are contemplated by the foregoing resolutions; and
FURTHER RESOLVED, that all actions heretofore taken and all documents heretofore executed and delivered by the officers of the Corporation, or any of them individually, in furtherance of the foregoing resolutions be, and they hereby are, ratified, confirmed, and approved in all respects; and (Note: attach all documents that were discussed)
There being no further business, on motion duly made and carried, the Chair declared the meeting adjourned.
[typed name], Secretary
WAIVER OF NOTICE OF MEETING OF THE BOARD OF DIRECTORS
OF [NAME OF CORPORATION]
I, the undersigned, being a director of [name of corporation], hereby waive [call and notice of] [any and all irregularities in the call and notice of] the [annual] [special] meeting of the Board of Directors held at [full address], at _____ [a.m.] [p.m.], on ____________, 20__.
Dated: ____________, 20__.
MINUTES OF [ANNUAL] [SPECIAL] MEETING OF
BOARD OF DIRECTORS OF [NAME OF CORPORATION]
A [annual] [special] meeting of the Board of Directors of [name of corporation], an ______________(state) corporation (Corporation), was held at _____ [a.m.] [p.m.] on ____________, 20__, at [full address].
The meeting was called by ____________________ and [notice was duly and timely given to each director] [all directors were either given timely notice of this meeting or else have signed a waiver of notice, which is attached to these minutes, or have waived notice by their presence at this meeting].
The following directors were present [list by name], constituting a quorum of the Board of Directors. [If no quorum was present, the meeting would be adjourned at this point.]
The meeting was called to order by ____________________, who acted as Chair of the meeting. ____________________ acted as Secretary of the meeting. The minutes of the meeting of the Board of Directors of the Corporation held on ____________, 20__, were read to those present, and there being no objections, corrections, or modifications thereto offered, the minutes were approved by a resolution moved by ____________________ and approved by voice vote of all of the directors.
Director ____________________ moved that the Corporation adopt a resolution to [description of resolution]. After discussion concerning this motion, on the affirmative vote of [number] in favor and [number] against, it was:
RESOLVED, that the year-end financial statements were reviewed and accepted.
RESOLVED, that the corporate filings and annual report, were reviewed and accepted. [Insert additional resolutions and actions of the board.]
Director, ________, moved again for the Corporation to adopt a resolution to elect officers of the Corporation to act for the forthcoming year or until their successors are elected and shall qualify. After much discussion concerning this motion, on the affirmative vote of __in favor and __ against, it was:
RESOLVED, that the following officers are elected to hold office for the forthcoming year or until their successors are elected and qualify:
There being no further business to come before the meeting, on a motion duly made, the directors voted to adjourn the meeting.
[typed name], Secretary
Limited Liability Companies
NOTICE OF THE [ANNUAL/SPECIAL] MEETING
OF MEMBERS OF [NAME OF LLC]
Notice is hereby given that, pursuant to a call of _______________, an [annual/special] meeting of members of [name of LLC] will be held on _______________, 20__, at ____ [a.m./p.m.], at [location]. The purposes of the meeting are
1. To elect Managers;
2. [any other purposes]
Only members of record as the close of business on ___________,20___, are entitled to notice of, and to vote at, the meeting.
By order of [person issuing notice].
[typed name and office]
WAIVER OF NOTICE OF MEETING
OF THE MEMBERS OF [NAME OF LLC]
The undersigned as a member of ____________, LLC, a ________ limited liability company, being entitled to vote at meetings of members of the LLC, does hereby waive written notice of the [annual/special] meeting of the members of the LLC [held/to be held] on [day of week], ______________, 20___, at [a.m./p.m.], at [location] for the purpose of [business transacted or to be transacted at the meeting].
Number of units held _______________________
MINUTES OF THE [ANNUAL/SPECIAL] MEETING
OF THE MEMBERS OF [NAME OF LLC]
The [annual] [special] meeting of the Members of _______________, a limited liability company organized and existing under the law of the State of ______, was held on the date and at the time and place set forth in the written Waiver of Notice executed by all holders of the outstanding Units in the Company. An executed counterpart is included in this minute book immediately preceding the minutes of this meeting.
_____________ was selected by those present to act as Manager of the meeting and _____________ was appointed to record the minutes of the meeting. All of the MemberS were present as follows:
Members represented [one hundred percent (100%)] of the ownership interest issued and outstanding in the Company. The Manager then declared the meeting duly constituted and called the meeting to order inasmuch as there was a quorum for business transaction.
The minutes of the last meeting of the Members were read and approved.
The Secretary read the annual report and distributed financial statements to those persons present. On motion duly made and seconded, the Secretary’s report was unanimously accepted.
[NOTE: If annual meeting and if an annual report is presented, add the following statement.]The manager then provided each of the Members with a copy of the ____(last years) company tax returns. After examination of the said return, there was a discussion regarding the same, and upon motion duly made and seconded, it was determined that said returns were good and fair representations of the business proceedings of the Company during the year _____.
The Manager then reviewed the activities of the Company by the officers and Manager for the preceding year and distributed copies of the minutes of the Member meetings. A full discussion was had regarding the activities of the officers and Manager based on the reports of the Manager and upon motion duly made and seconded, it was:
RESOLVED: that the actions of the officers and Manager of this Company taken since the last annual meeting of the Member of this Company, be, and the same are hereby, fully ratified and approved.
The Manager then gave a report about those actions taken in addition to those indicated in said minutes with regard to all matters pertaining to the business of the Company. Upon motion duly made and seconded, the following resolution was unanimously carried:
BE IT RESOLVED that all action of the officers and Manager of the Company taken from the time of the last meeting of the subscribers to the time of this meeting, be and they hereby are, ratified and approved in all respects.
The Manager state that the first item of business to come before the meeting would be the election of the Managers of the Company, to serve until the next annual meeting, or until their successors shall be duly elected and qualified. Upon nominations duly made and seconded, the following resolution was unanimously carried:
BE IT RESOLVED that the following be, and they hereby are, elected managers of the Company, to hold office until the next annual meeting or until their successors shall be elected and qualified:
[set forth the exact text of each resolution in the order presented to the meeting along with the votes cast for and against each; consider adding a discussion of the substance of the resolution, especially if it relates to a complex, material transaction, such as a merger or sale or an action relating to pension plans for employees].
There being no further business to come before the meeting, upon motion duly made and seconded, the meeting was unanimously adjourned.