All corporations (other than close corporations) must abide by corporate formalities if they wish to maintain their limited liability shield and not fall afoul of various state bodies. Below is a brief guide for these required regular meetings.
Both directors and shareholders of a corporation must formally meet at least once a year (or more, if it is specified in your bylaws) in order to discuss and retroactively adopt any major business decisions that have been made, and any that are pending. However, if your bylaws allow, you can hold this meeting over video chat, provided everyone can hear each other and be heard by everyone else. Also, for small corporations, generally the directors and shareholders will overlap, or be entirely composed of the same people. While it may be tempting just to roll both of these meetings into one and keep one set of records, you should avoid doing this. Instead, hold the directors’ meeting first and formally close it out, then start the shareholders’ meeting immediately after.
Records (i.e. Meeting Minutes)
It is extremely important to keep a record of these regular meetings, which is why the corporate governance packet (hopefully) supplied by your attorney will generally contain agenda and meeting minute templates for use during these regular meetings. Failure to keep these records can result in some nasty and very much unwanted problems for the corporation, including the destruction of your limited liability shield, potentially exposing all of your personal assets to creditors, the IRS, state tax agencies, or even a private plaintiff in a lawsuit.
“Notice” and “quorum“ are two additional important concepts to understand for these regular meetings.
The Secretary must ensure that all directors and shareholders have received adequate notice of the meeting, including all agenda items to be discussed, at least a few days before the meting is to take place (the exact amount of notice time required should be included in your bylaws). However, if the Secretary fails to give the required notice, this can be overcome if all of the directors or shareholders actually show up to the meeting (their presence at the meeting is counted as a “waiver” of this notice requirement).
A quorum is a legal term for, basically, the minimum required number of directors or shareholders that need to be present for a meeting to actually take place. It is meant to serve as a protection against a minority of directors or shareholders making decisions on their own. An organization’s required quorum is usually simply a majority of the directors or shares of the business, but you can set it at a higher number (e.g. 2/3 of the current directors or outstanding shares). Without a quorum present at meetings, all decisions made are void and must be voted on again at a subsequent meeting with a quorum. The Secretary should do a head count at the start of the meeting and announce that a quorum is present before the meeting actually begins.
We get it – corporate formalities are tedious and seemingly unnecessary. However, investing a half hour ever year can mean the difference between successfully protecting your house from someone suing your business, and losing everything because of a failure to observe these formalities. The potential return on time investment in terms of risk reduction is enormous.
By: Kieran de Terra, Esq. – 04/09/17
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