Probably the most important reason individual clients form a corporation in order to conduct their business, is asset protection. If the business involves multiple shareholders this is an even more important consideration, since in a general partnership comprised of two or more partners, each partner has unlimited personal liability for the debts and liabilities incurred through the intentional acts, failures to act, and negligence of his business partners in conducting the business. However, the tradeoff for maintaining the benefit of that asset protection is the relatively minimal task of observing the necessary corporate formalities, i.e. acting like a corporation rather than a sole proprietorship or a partnership.
One of the more mundane tasks associated with operating in the corporate format is for important decisions to be made or ratified by the board of directors and for those decisions and other important events to be documented in written corporate minutes which are usually maintained in a corporate minute book. California has shown a willingness to disregard the corporate entity and allow a plaintiff in a lawsuit to “pierce the corporate veil” and get through to the assets of individual shareholders in cases where the business has not been acting like a corporation, observing the corporate formalities, but rather is arguably nothing more than the alter ego of the individual shareholder, or shareholders. In addition to the failure to document important corporate actions and events in written minutes, there are additional risk factors that can trigger alter ego liability, such as failure to adequately capitalize the corporation to engage in the type of business it is doing, the frequent transfer of money back and forth between the corporation and its shareholder(s) without appropriate loan documentation, etc.
I have received calls on several occasions from individuals who are suddenly alarmed because they or their corporation is the object of an audit by the IRS and a request has been made to review the corporate minute book, which perhaps has not had any minutes of a meeting prepared since the initial minutes of the first meeting of the board of directors years earlier, or one or more shareholders have been named as individual defendants in a lawsuit that also names their corporation as a defendant, in which it is claimed that the individuals are liable along with the corporation, for some breach of contract or other act or failure to act. All of a sudden, attention turns to whether the corporation has effectively protected their personal assets by having observed the formalities of operating like a corporation, including documenting important contracts entered into, such as commercial and equipment leases, service agreements, authorizing the actions of corporate officers and other employees, entering into employment contracts, etc.
Because the preparation of corporate minutes at least once a year for both shareholders and directors meetings, or written actions of shareholders and directors in lieu of meeting minutes, which makes more sense when there is only one shareholder, is often laborious for the client and tends to be postponed, my office offers that service to our corporate clients, and I have developed an easily completed questionnaire that can be emailed to the client, filled in, and returned by email, allowing us to then prepare corporate minutes that embody the important actions, decisions, and events that should be documented at least annually. The questionnaire serves the purpose of jogging the memory of the person completing it as to things that have occurred and should be documented during the year covered by the minutes. Examples of such items would be changes of location, lease agreements entered into, change of banking relationships and/or authorized signatories on accounts, purchases and leases of major corporate assets, hiring or firing of key corporate employees, major customer contracts entered into, payment of bonuses to key employees, adoption of a retirement plan or group health plan, etc. We make a minor charge for this service, which saves time and “drudgery” for the client while helping to keep the corporation in compliance with the necessary formalities to provide the personal protection that was a major reason for its formation in the first place. If you would like us to provide this service for your corporation or have further questions, please contact us.