Friday, August 20, 2010

Reduce Risk of Personal Liability with Corporate Formalities.

One of the things I love about being a small business attorney is interacting with other small business attorneys across the country and reading other small business law blogs.  One such blog is the Entrepreneur and Start-Up Law Blog by Michelle Grenier

Here recent post about corporate formalities is re-posted below because it presents this important subject matter in a very easy format to understand and follow.  You will not get this information from LegalZoom.  Ms. Grenier practices in Massachusetts and Maine.  If you have any questions about corporate formalities, please contact a qualified business attorney.

Below are some suggestions for reducing the risk of personal liability for Shareholders and Directors of your corporation: 


Here is the “Do” list:

Schedule, Give Notice of and Hold Shareholder and Director Meetings:

■Read and know the provisions set forth in your corporate By-Laws. I know it is not the most exciting reading, but it is important to know and comply with the "rules" of your corporate organization.

■Your corporate By-Laws should set forth the date for your annual Shareholders' meeting.

■Your corporate By-laws should require an annual Board of Directors meeting to be held on a date relatively soon after the annual shareholders' meeting.

Schedule, Give Notice of and Hold Special Meetings of the Board of Directors for important matters, for example:

■Changing an officer’s salary;

■Opening a new bank account;

■Offering to enter or entering into a new lease or option to lease;

■Applying for or entering into a funding commitment for a substantial sum;

■Making an offer concerning a substantial agreement or entering into any other significant contractual agreement ;

■Filling a vacancy on the Board of Directors (Note, Shareholders typically elect Directors) or appointing a new officer;

■Broadening the purpose of the business and/or the business activities which the corporation will be involved (e.g. entering a new industry);

■Considering the sale, in whole or in part, of the assets or the dissolution of the business (Note, Shareholders typically have to approve, on this subject as well).

Create and maintain good corporate records.

■Record minutes of all shareholder and director meetings;

■Maintain accurate corporate record book.

■Create and maintain good financial records.

Act in best interest of shareholders; Keep corporate information confidential.

■Directors owe a fiduciary duty to the shareholders of the corporation, meaning that they must act in the best interest of the corporate shareholders.

■Keep matters that come before the Board of Directors as confidential as possible.

Develop a Review and Analysis Plan:

■Review, analyze and revise goals (6 month goals, 1 year goals, 5 year goals, 10 year goals and 20 year goals).

■Review and revise budget at least every six months.

■During the first and last month of each fiscal year, review each year's business activities.

■Review business operations with your attorney.

■Review business operations with your CPA.

Authorized Signatories should sign all contracts in their corporate capacity (e.g. as President of xyz, inc.). Otherwise, the signatory could be exposed to personal liability for the contents of the signed document.

■ Corporation should have a resolution authorizing certain officer(s) to sign certain documents.

■All purchases for corporate should be made in the name of the corporation (name of corporation should be on all invoices, purchase orders, etc.)

■Maintain separate corporate bank account for corporate funds, assuring that such funds are not co-mingled with any other funds.

■Obtain and maintain liability insurance policy with limits not less than industry standard, for the corporation and directors.

■Fund the corporation at the time of incorporation with enough funds to maintain the corporation until supplemental influx of revenue.

■Always comply with provisions set forth in the By-Laws, Articles of Incorporation and other controlling corporate or contract documents.

Here is the short “Don’t” list.

Don’t fail to do the “Do’s.”

If you have any questions about anything contained in this post, please do not hesitate to contact me at (951) 737-4040 x2 or The Out-House General Counsel.

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