We know – all of these annoying formalities are not the reason you started your business in the first place. However, a little time investment on your part upfront ensures that you don’t have any weird and costly problems down the road, for which attorneys will happily charge by the hour to rectify.
The most important of these initial formalities for a corporation (at least of the ones that your lawyer cannot handle for you) are the initial director and shareholder meetings. These meetings solidify various aspects of your business, such as who is officially involved and how it will be governed. These are important pieces to nail down at the start, because if you don’t do them you could end up in a situation where the people who thought they were shareholders in your business technically aren’t (or, even worse, that your attorney, and not you, legally owns your business because you never formalized the transfer of authority from them to you).
Luckily many (competent) attorneys who form corporations for their clients will include a packet of corporate governance documents that make these early formalities relatively painless and straightforward. Following is a short guide and explanation of the various steps.
1. First Meeting – Board of Directors:
When you receive your corporate governance packet, you should read through the documents to ensure that you have at least a familiarity with their contents. In this packet, you will (or should) find a Statement of Incorporator, which officially appoints the initial Board of Directors. This document is what transfers authority over the corporation from the individual who formed it (the incorporator), to you and your fellow founders as the initial directors of the corporation.
The first meeting you will hold as directors will be the Board of Directors meeting, and you will use the corresponding Board of Directors Meeting Minutes to help guide you through the required formalities of, for example, appointing a Secretary, President, and Treasurer, adopting the Bylaws, adopting a share template (or uncertificated shares, as we generally recommend), etc. Whoever is running the show at this meeting (generally called the “temporary secretary” or “temporary chair”) should be in charge of filling in the blanks and making sure that all the resolutions are accurate for what the business wants. As an aside, “resolutions” are how decisions are formalized by the directors and shareholders. You can create your own resolutions by inserting paragraphs that begin with “RESOLVED that…[insert decision to be taken].”
At the end of the meeting, the appointed secretary should sign the Meeting Minutes, the Bylaws, and, along with the President, the share certificates or Initial Transaction Statements that formally issue shares to the shareholders.
TL;DR (too long; didn’t read): Directors of the corporation must meet, read through a template of the meeting minutes for the meeting to understand what they are agreeing to, and then adopt, agree on, and/or sign the following:
- “Uncertificated” shares (basically a simpler way of dealing with share issuances),
- Appointment of required officers – President, Secretary, and Treasurer,
- Issuance of shares to shareholders (for small corporations generally this means issuing shares to yourselves).
1.5 Alternative to First Meeting – Unanimous Written Consent
If you really cannot bear to be in a room with your fellow directors (and if this is the case, then you should reconsider going into business with them), or you simply do not have the time to all coordinate a meeting, the shortcut for an Initial Board of Directors meeting is a document, signed by all of the directors, that basically confirms that everyone has consented to the initial corporate formalities. You should only use this shortcut if you know that no one wants to discuss or change anything regarding the formation of the business, and that you can get everyone’s signature (generally not a problem for small startup corporations).
2. Second Meeting – Shareholders:
Once the directors have issued shares and closed out their meeting, it’s time for the Shareholder meeting. With small startup companies this generally involves the exact same people as were in the directors meeting (so sit back down, Jimmy). The shareholder meeting is even more of a formality than the directors’ meeting. The shareholders simply adopt and ratify everything that has already been decided upon by the directors. Yes it seems duplicative, but it is a requirement that must be observed if you are to be taken seriously as a company by outside parties, such as investors.
As you may or may not already know, LLCs require far fewer formalities than corporations. These cascading initial meetings are one such example. For new LLCs, the only required formality is for the Members to adopt an Operating Agreement. LLCs are not required to hold regular meetings, but when they do, everything that takes place or is decided during the meeting should be documented in meeting minutes. Failure to record these meetings and decisions will have the same result as a failure to do so in a corporation.
Ok, I Get It…I think:
While seemingly pointless and duplicative, initial corporate formalities are one of the most important parts of the teething process for new corporations. Your friendly business lawyer should provide you with a packet of governance documents to get through this phase, and can advise you if you are confused about anything in the documents. You should not simply accept this packet with a “thaaaanks,” and then proceed to toss it in a corner, or bury it in a never-to-be-opened folder in the depths of your computer. Doing that is the structural equivalent of building a multimillion dollar house on a foundation of stilts…in earthquake-prone southern California… on a cliff.
If you would like to read up on the required ongoing regular meetings, our article here should give you some useful practical advice.
By: Kieran de Terra, Esq. – 04/09/17
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