Observing Corporate Formalities

Leslie M. Gieger

Author: Leslie M. Gieger

POST DATE: 11.10.16
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Business owners often view corporate formalities as burdensome and needless. Often, a company will not have formal annual meetings, or if formal annual meetings are held, a company may often forget to keep appropriate minutes. Following these corporate formalities by holding regular meetings and documenting significant transactions may act to shield a business owner from personal liability in the event a creditor attempts to “pierce the corporate veil”. Additionally, if the Internal Revenue Service wishes to conduct an audit of your business or if a disgruntled shareholder files a lawsuit against your business, one of the first few documents requested will be the corporate minutes. Accordingly, it is essential to keep complete and accurate documentation to support the major decisions that are made by the business whether you are a sole proprietor or public corporation.  

In determining what information should be recorded in corporate records, business owners should consider different claims a creditor may have for holding the business owner personally responsible. For instance, if the company loaned money to a shareholder, creditors could claim the business owner was simply using the company’s bank accounts as his own personal checkbook. However, by documenting the proposed transaction, discussions and vote, the company may be able to demonstrate that the loan was made for a legitimate business purpose. Did the shareholders vote on the transaction? Were the shareholders disinterested in the transaction? Is there a promissory note evidencing the company’s receivable?

Corporate minutes need not be overly burdensome to complete. In fact, if the company includes the following information, the minutes are more than likely sufficient:

  1. Election of directors and officers.
  2. Major purchases or expenditures.
  3. Major changes in benefits.
  4. Major changes in key employee positions, including the hiring, dismissal or creation of new positions.
  5. Opening, closing or moving of branches.
  6. Major actions taken by directors, officers, or shareholders.
  7. Loans of considerable sums taken out by the corporation.
  8. Time, date and location of meetings.

If any major or emergency event takes place, the company should also prepare special minutes for insertion into its corporate record book. The more detailed the minutes, the stronger the shield. By observing these corporate formalities, the company will likely succeed in preventing future headaches for the company, shareholders and their accountants and attorneys.