Introduction

As the close of the year approaches, your company should ensure it has documented its major transactions during the past year and otherwise complied with its corporate formalities.  Failing to do so can jeopardize the “limited liability” provided to corporations, leaving your shareholders exposed to claims based on corporate activities.  Even if you are a closely held corporation with only one or a handful of shareholders, now is a good time for your Board of Directors and shareholders to pass appropriate resolutions concerning the activities of the previous year. 

Pass Appropriate Board Resolutions

Any company that has not held a director’s meeting during the year or documented important transactions such as loans, the sale of major assets or purchases of unrelated business lines, ought to prepare company resolutions recognizing and approving such transactions.  Ideally, the resolutions should follow a meeting of the company’s Board of Directors.  If it is impractical for the company’s directors to meet, written resolutions approved by the directors may, in many cases, be substituted.

Call a Meeting of Shareholders

Similarly, many company bylaws specify that a shareholder’s meeting be held on a yearly basis.  This meeting would typically include the shareholders’ election of the directors whose terms had expired.  Even where the company’s directors are not subject to election in any particular year, the meeting of shareholders serves the valuable purpose of demonstrating the company’s compliance with the formalities of corporate law.

Ignoring the Corporate Formalities Can Be Dangerous

The importance of maintaining the formal integrity of the corporation, which is a separate entity from its shareholders, cannot be overstated.  All major transactions taken by the corporation should be reflected in official minutes, even if the corporation consists of only one director or shareholder. Failure to do so can allow third parties to sue the shareholders directly for corporate debts under a legal theory entitled, “piercing the corporate veil,” a theory that could potentially expose the shareholder and his/her personal assets.  For the same reason, the corporation must always be treated as a separate entity.  All contracts entered into by the corporation, including employment contracts, buy-sell agreements, profit sharing plans, pension plans, trust agreements, loans, leases, purchase contracts, and corporate brokerage investment accounts, should be made in the name and on behalf of the corporation, and should be memorialized in the form of appropriate minutes which are to be included in the corporate minute book.

Start Off the New Year on a Strong Note

Taking the steps of documenting your company’s transactions over the past year will provide a strong foundation for meeting the challenges of the year ahead.  If you have any questions, Trepanier & MacGillis P.A. is available to consult with you or your company’s Board of Directors to ensure that the loose ends of the past year are fully addressed.