Now that you have a separate legal entity, whether a corporation or LLC, it is important to operate it properly. You do not want to ignore the corporate existence because if you do and go to court, your legal entity may be ignored and you may be held personally liable. You do not want that to happen. When you form the separate legal entity it provides a layer of protection between your business and personal assets. That is why the corporation or LLC will obtain a separate Tax ID number, have a separate business license. It is a separate legal entity from you. A corporation can do everything you can do, except act or think. It will “act and think” through corporate (LLC) formalities. That refers to director and shareholder (manager and member) meetings, notice of meetings, minutes, and resolutions on important corporate decisions made by the company. Even if you are a one-person corporation or LLC, yes, you have to have a meeting as your capacity or title of the separate legal entity. I know it sounds like having a meeting with yourself to make a decision sounds like you are one step away from a trip to your psychiatrist’s office, but remember, you have to document your decisions in your capacity.
What about LLCs? We would hear for years, forming an LLC is “easier” than a corporation. Meaning, supposedly you did not have to do the same minutes and resolutions as you do with a corporation. You could avoid the “corporate formalities.” Typically, we do not believe most things we read until we check it out. We hired an attorney to research court cases on where someone was attempting to pierce the LLC veil (that means make a claim that the LLC was not operated as a separate legal entity but as the alter ego – same as the owner). In these cases, the judges were looking to corporate law for guidance. Remember, LLCs only started in 1977 and become more popular after 1997 when the IRS created the “check the box” rules making it much easier to determine how an LLC would be taxed. The judge basically said, well, in corporations you need to evaluate three areas:
· Corporate formalities
· Commingling of funds
If there is a situation where a corporation did not follow the corporate formalities or commingled funds (meaning they use corporate funds for personal use) and under-capitalized the company, the corporate veil could be pierced and that means someone suing the corporation could come after the owner personally!
This is not good, of course. As a side note, Nevada is one of the toughest states to pierce the corporate veil; you basically have to prove outright fraud on the part of the board of directors and officers. The judge in this case said, let’s use the same standards for the LLC. Let’s see, did you do any formalities, any meetings, minutes, resolutions? Nope. That is not good. The judge allowed the LLC veil to be pierced for that reason. This was about 8 years ago, and since then we have had our LLC record book look very similar to a corporate record book with minutes, meetings and resolutions throughout the LLC record book. Most competitors in our industry never did that until recently and still some do not. Now, you will hear the term called, “piercing the ENTITY veil” not just piercing the corporate or LLC veil. Now that you have the background, let’s go through some of the basic rules that you should be following:
1. Minutes of the first directors’ meeting (sometimes referred to as the “organization meeting of the corporation.” Minutes refer to the organization meeting of a corporation or LLC. Minutes are a formal record of the proceedings of a corporation. The organization meeting is to approve standard items of business necessary for a new corporation or LLC to begin doing business.
Guideline – How to Keep Corporate :
_____ Write out the type of meeting (Directors’ Meeting, Stockholders’ Meeting, Special Meeting of the Directors, etc.)
_____ State the time, date, and location of the meeting.
_____ Record the full names and any titles of all those present.
_____ If anyone (or everyone) appears without receiving proper notice and waives notice (a common practice), record this fact.
_____ Identify by name and title the person who is conducting the meeting.
_____ State that an agenda was distributed and attach a copy of the agenda to the Minutes.
_____ Record the high-points of discussion on each agenda item, including any motions, the seconding of any motions, the results of any voting, any dissension or abstentions, and anything else that does not seem trivial. If in doubt, include it in the Minutes.
_____ Attach to the Minutes copies of any resolutions passed, any documents offered as an addition to the Minutes, and any written reports discussed or referred to during the meeting.
_____ When the complete record of the meeting has been made, the secretary must sign the record as being the official Minutes of the meeting.
2. Issuing Stock or Membership Interests. A new corporation or LLC needs to have owners. Typically an owner, whether an individual or another legal entity (be careful of shareholder rules – for example an S corporation CANNOT have a C corporation, LLC taxed as a partnership or a foreign owner) will capitalize the new entity (with money, assets or services – check each state for what is allowed). Let’s say you deposit $1,000 into the new LLC bank account. That may represent your capitalization in exchange of the membership interest to the LLC. If you have a partner make sure you get the math right on the percentage of ownership. Corporations have shares and stock. LLCs have membership units and membership certificates. Make sure you complete the operating agreement for an LLC with Schedule A which tells who the owners are and issue membership certificates (and complete the stock “member” ledger. In the corporation issue stock and completing the stock ledger will tell who the owners are.
3. There are three ways to make and document formal corporate decisions (by board of directors or shareholders).
A. Meeting with minutes
B. “Paper” meeting with minutes, and
C. Action by written consent Meeting with minutes.
This is where the directors or shareholders actually get together in a real meeting to discuss and vote on items of corporate business. During or after the meeting, writing minutes are prepared showing the date, time, place and purpose of the meetings and the decisions (resolutions) approved by the board of directors or shareholders. Paper Meeting with minutes. In this situation, the directors or shareholders informally agree to a specific corporate action such as the election of a new director. The minutes are prepared as though the decision was approved by a real meeting of directors or shareholders. This is called a “paper” meeting since it only took place on paper and there was not an actual meeting to discuss. Action by Written Consent. This is the fastest and least formal way to taking formal corporate action. In this situation, the directors or shareholders consent to a decision or action in writing by signing a written consent form. Minutes for a real or “paper” meeting are not prepared. Only the written consent forms are keep in the kept in the corporate record books, to indicate the directors and shareholders made the necessary decisions.
Formal meetings. Corporate statutes usually require annual board of directors’ meetings and shareholder’s meetings. The annual shareholder’s meeting is held first to elect the board for the upcoming year. After the shareholders’ meeting, usually the same day, the annual directors’ meeting is held. The directors will accept their positions for the upcoming year and tend to any business that is required.
All other meetings during the year are called special meetings. They are called at any time according to the rules in the bylaws. These meetings may be called to discuss urgent items of business to approve any legal or tax issues that may arise (an example may be a loan, changing the taxation of the entity…). Corporate and LLC formalities are an important part of operating the corporation or LLC as a separate legal entity. They document important decisions that were made and also the reasons for those decisions. These items come into play later if the entity is audited by the IRS (Internal Revenue Service) or by a court with a lawsuit against your company. Minutes may be used to document corporate decisions and expenses that may be requested later as part of a lawsuit.
As you can imagine, many entrepreneurs are overwhelmed and too busy with their business to keep on up their corporate books. Yet, this is an important subject to address and complete. We would recommend once a month you schedule an hour to complete any major corporate resolutions, minutes or meetings that pertain to activities that month. It is more ideal if you create minutes on important decisions with your business after the meeting or during it to get in a habit. You can use your corporate or LLC record book as a guideline as you go along. I have included a few resources that may help simplify this area for you.
NCP members only: downloadable resolutions
Nolo Press: The Corporate Minutes Book
ManagemyMinutes.com online software
About The Author: Scott Letourneau is the CEO of Fast Business Credit, Inc. When it comes to securing cash and vendor lines of credit and avoiding costly mistakes his company is the authority. For further assistance regarding the development of business credit go to http://www.FastBusinessCredit.com or call FBC at 1-888-313-6333 or 702-977-5246.