If you started your own corporation, kudos! Entrepreneurship is truly the road to success. Those who have been there know that running a business is no easy task.
Your time may be preoccupied with marketing and doing the work you set out to do. Especially as a sole shareholder, it is easy to put corporate formalities on the back burner. After all, who needs corporate minutes when you are the corporation’s chairman of the board, its president, secretary, treasurer, or whatever other title you chose to bestow upon yourself, right? Well, wrong!
Corporate formalities can be time consuming. And if you are a sole shareholder, holding a meeting and an election with only yourself can be awkward. However, corporate formalities, such as holding regular meetings and keeping proper minutes of those meetings, will ensure that the liability protections a corporation provides stay in place. Ultimately, no entrepreneur wants to be served with a lawsuit that seeks to “pierce the corporate veil” of your company and reach your personal assets. This blog post addresses some of the major corporate formalities business owners need to follow and the possible repercussions for failing to do so.
What are corporate formalities?
A corporation is a separate entity. But it only remains a separate entity as long you treat it as such. To ensure that you have the right documentation to show that you have done so, you need to hold all required meetings and keep proper records. Below is a list of some of the meetings you must hold, records you must keep, and actions you should take.
(1) Annual shareholders meeting
California Corporations Code section 600 requires you to hold an annual shareholders meeting. The date and time of the meeting should be set out in your bylaws. Remember to give proper written notice of each shareholders meeting no less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before the date of the meeting. At the meeting, shareholders typically elect the board of directors for the upcoming year.
(2) Regular directors meetings
While the California Corporations Code does not require that annual directors meetings be held, it does require regular meetings. As such, you should hold regular meetings throughout the year. If no notice is given, directors must sign waivers of notice.
(3) Special meetings of directors and shareholders
With some major corporate decisions, such as mergers or appointment or removal of directors, you will need to hold a special shareholders meeting. Similarly, with major financial decisions, such as deciding on a new office location, opening a bank account, or obtaining a corporate credit card, you may need to hold a special meeting of directors. Again, you should follow all notice requirements set out in the California Corporations Code.
(4) Corporate minutes
Holding a meeting is one thing, proving that it took place is another. For that reason, you should always type up your corporate minutes and describe when and where the meeting took place, who was present, and what actions were taken at the meeting. If you are ever taken to court, your minutes may be the best evidence to show that you have followed all required corporate formalities.
(5) Follow your bylaws
It is essential that you follow the rules and procedures you have set out in your bylaws. While this may seem obvious, too many small business owners never even read their corporation’s bylaws.
(6) Act in the best interest of the corporation
Corporate directors owe certain fiduciary duties to the corporation and its shareholders. Generally, directors must act in good faith, in the best interest of the corporation and its shareholders, and with such care that an ordinarily prudent person in a like position would use under similar circumstances. Corporate officers should abide by the same rules.
(7) Act in your official capacity
To ensure that the records you create do not leave any doubt as to the separation of your personal and your corporate affairs, always include your corporate title on any documents you sign on behalf of the corporation.
(8) Maintain proper financial records
When running a corporation, always make sure that your corporation is properly capitalized and operates with its own financial assets. Separate, well maintained, and organized financial records are essential when showing the existence of a separate corporate entity. Never comingle your personal assets and the assets of your company.
(9) File an annual Statement of Information
In California, corporations are required to file an annual Statement of Information with the Secretary of State. Failure to do so can result in the suspension of your corporation.
(10) Pay your taxes
Failure to pay the California Franchise Tax can lead to the suspension of your corporation.
What are the repercussions?
As noted above, failure to follow some of the basic corporate formalities could result in the suspension of your corporation. Worse yet, failure to treat a corporation as a separate entity can open the owners of the corporation up to personal liability for the debts of the corporation.
Sole shareholders running their own businesses should be especially careful. When you play the role of a shareholder, director, officer, and sole employee, the line between personal and corporate business may become blurred. Accordingly, to avoid personal liability, it is extremely important to follow all corporate procedures and keep proper records.
If you are seeking advice regarding your corporate obligations, call 1-844-HOLBORN or email us and one of our business law attorneys will be happy to assist you.
Disclaimer: This post is meant for general informational purposes only, and it is not to be construed as legal advice. As with any laws, the information in this blog post may change at any time and may apply differently in different jurisdictions. The post may constitute Attorney Advertising as defined by the rules of professional responsibility of some jurisdictions. Holborn Law is based in Orange County and Riverside. The attorneys of Holborn Law APC are active members of the State Bar of California and licensed to practice law in California. All services relating to immigration and naturalization provided by Holborn Law APC are provided by active members of the State Bar of California or by a person under the supervision of an active member of the State Bar of California.