TIP #7: Many of BMBR LLP’s top ten list of things every business should do to avoid common mistakes revolves around documentation. In regards to corporations that is not only advisable but it is legally required. Regardless of whether your business has to meet “corporate formalities” or not, you should.
Assuming the corporation is properly formed, the shield against personal liability afforded to the directors and shareholders of the corporation may be lost if the business fails to adhere to basic corporate formalities. California Corporations Code §1500 provides:
Each corporation … shall keep minutes of the proceedings of its shareholders, board and committees of the board …. Such minutes shall be kept in written form. Such other books and records shall be kept either in written form or in any other form capable of being converted into written form.
If regular meetings are not held and minutes adequately maintained, the corporate veil may be pierced and the directors and shareholders may be held personally liable for the corporation’s debts.
- Board of Directors’ Meetings – The Board of Directors manages and exercises the corporation’s business, affairs and powers. As a result, corporations must hold regular meetings as defined in the corporation’s bylaws. Actions by the Board of Directors may also be taken at special meetings or by the written consent of the directors without a meeting. The bylaws typically require that regular meetings be conducted monthly, quarterly, annually or at other more frequent intervals. Under the California Corporations Code, the Board of Directors is required to approve key decisions which affect the legal rights of the corporation. Entering into major contracts, issuing shares of corporate securities, and distributing corporate profits, are just a few examples of the activities which require approval of the Board of Directors.
- Shareholder Meetings – Shareholders must act on certain corporate matters. Action by the shareholders may be taken at annual or special meetings of shareholders, or by the written consent of shareholders without a meeting. For example, Shareholders must elect directors, approve changes to the articles of incorporation, approve mergers, acquisitions, or the sale of substantially all of the assets of the corporation, and authorize dissolution of the corporation. Shareholders should be provided with financial statements of the corporation which minimally include a balance sheet, income statement, and statement of changes in the financial position for the fiscal year.
Corporations are statutorily required to keep records. Many other forms of businesses are not. Even if your entity or business is not legally required to hold meetings or memorialize decisions through resolutions, it is a best practice to do those things. It helps avoid misunderstandings and keeping records keeps businesses on track with their goals.