My article review is written generally from my personal perspective on a closely held small business entity operating as a “C” or “S” corporation, a limited liability company, in some cases a limited partnership, and even certain types of trusts.
This article was published by Inc. and it is copyrighted 2000 by Nolo.com. (I love Nolo!) It is very much on point for our purpose and discussion here. It nicely covers in short order the importance of corporate minutes.
Forming a corporation is an important, and sometimes exhausting, task. Typically, after the new entity is established and the initial shares sold to shareholders, the owners take a deep breath and get back to doing what they do best — running the day-to-day business operations. Unfortunately, as a result, the owners often put off dealing with many tasks necessary to running their new corporate entity.
I know this to be true from a lot of years of experience working with small business owners. They know their business, but not their company. They are long on operations, but short, very short on attending to the formalities such as holding corporate meetings of the directors and shareholders, and keeping accurate and timely minutes of official acts and resolutions adopted.
Sound familiar? I conservatively estimate that ninety percent (or more!) of the small business owners, operators, and executive officers I’ve talked with and dealt with for over thirty years are grossly negligent when it comes to maintaining their formal business organization correctly.
What I’ve seen and learned from these people is that, generally, they fall into one (or more) of three categories:
1. They are far too busy running their business. They don’ t think they have the time to coordinate formal meetings, draft resolution language, issue calls and notices of meetings, make meeting agendas, assemble the parties, convene, record and memorialize the meeting minutes, then properly file and store the formal records. And/or. . .
2. They are intimidated by the overall process. They incorporated their business for benefits, such as limited liability and tax advantages. When their articles of incorporation or organization were prepared and filed, they may or may not have been aware that the filing was the first step to “organizing” and formally running their company. Afterward, when they realize that their small business must observe the same formalities as any large firm, and they began to learn about the process involved, they realize they may be outside their comfort zone and in way over their head. Then they worry about it, but they don’t act.
I’ve seen it a lot. The scenario varies slightly depending on the business owner’s situation or point of view.
A do-it-yourselfer might prepare and file their articles with the state corporations division using no outside professional help. They figure they can save on professional fees. This is true. They can get fill-in-the-blank forms and make the filing them self with their state’s corporations division. Typically, if/when the DIYer discovers there is ongoing formal work to attend to, they wing it with a hope and a prayer; they can fix it later. Easy peasy. . .
Another one will hire an incorporating “mill” that specializes mainly in cranking out and filing the paperwork for them to form their company, hopefully at a reasonable initial fee. Such services are very popular with small business owners and operators. After the articles are filed, the mill master begins its upsell pitch offering how-to books, videos, classes, and seminars that will teach the new owner/operator how, when, and why they must “observe the formalities” of corporate existence and maintenance. Or else: litigators, revenue auditors, and all sorts of potential suitors will come for their share of their easy pickings.
A new company owner/operator (you?) might buy the materials the mill is selling, and that comes with fill-in-the-blank forms ready for them to complete and file away in their new corporate records and minutes book. But to no avail. In the end, they just don’t or won’t do it themselves. Maybe they still aren’t confident using blank forms.
Others have their lawyer do this work. These are many times the more affluent folks, or they are i-dotters and T-crossers. They pay for peace of mind and assume the lawyered documents are prepared and in good order for them.
And/or. . .
3. They are ignorant or don’t care about the rules. They don’t know or think that, in their case, it is necessary or required for them to play their official roles (as director, and, separately and differently, as a shareholder), hold meetings, make minutes and resolutions, and keep complete company records. In a solely owned company, mom-and-pop concerns, and closely held companies (a handful or so of owners, but not large), this is often the thinking. They wonder, “Why would I hold a meeting with myself?” Or, “Why should me and my spouse or business partner convene a formal corporate meeting?” Or, “Do we really need to call a meeting of just the six of us stakeholders or officers?”
The article explains why:
Ignoring the care and feeding of your corporate legal entity is foolhardy. That’s because failure to properly document and support important tax decisions and elections can result in a loss of crucial tax benefits. Even worse, the fact that you have ignored your own corporate existence may result in its being similarly disregarded by the courts, with the risk that you may be held personally liable for corporate debts.
Litigators easily persuade judges – even in flimsy or frivolous cases – that an owner/operator’s mis- or maltreatment or ignorance of company formalities, coupled with derelict directors and shareholders who ignore or never address such neglect, makes them (you) personal liability for company debts and obligations. Translation: If you ignore the company’s separate legal existence, why shouldn’t they, also? The corporate veil gets pierced, judgment is for the plaintiff, and it attaches to the owners’ personal assets and those belonging to the company.
And, of course, as time passes and memories fade, if there is no written record of important decisions, directors or shareholders may forget who agreed to what and under what circumstances. This can lead to controversy and dissension, even in the ranks of a closely held corporation.
Especially in the ranks of a “closely held corporation.” Imagine the resulting internal fighting to come, with family, partners, associates, investors, friends. The minutes record the directors’ or shareholders’ so-called meeting of the minds. When important transactions or decisions are made, and the record of it is set down in writing, signed by all entitled parties to the transaction, that usually settles the discussion.
Your corporation’s formal and final minutes and resolutions create a powerful record. Listen to these vintage courts talk about corporate minutes.
- They are presumed to be correct. (Young v Janas, (1954) (Del. Ch.) 103 A. 2d 299);
- They are prima facie evidence of the facts they recite. (Santa Fe Hills Golf and Country Club v Safelic Realty Co., (1961) S. Ct. Mo., 349 S.W. 2d 27, and other cases);
- Together with the bylaws, minutes are the highest proof of the powers of the corporate officers. (Gentry-Futch Co. v Gentry, (1925) 90 Fla. 595, 106 So. 473); and
- Minutes are the best evidence of the events or decisions they record. (American & British Mfg. Corp. v New Idria Quicksilver Mining Co., (1923) 293 F. 509, and other cases.)
“Correct.” “Prima facie evidence.” “Highest proof.” “Best evidence.” That’s mighty strong. If corporate meeting minutes are the best evidence of corporate events and decisions, then what evidence is better?
We cannot and should not rely on our memories of corporate events. We have to write down the details of those events, acts, and decision; then sign off in agreement (or, object on the record). Preferably, contemporaneous with the event, act, or decision.
And, of course, people lose their mind, become incapacitated, and die. Their guardians or heirs may question past corporate decisions that now affect their positions. How can that be settled with any semblance of certainty?
Fortunately, the regular structured use of written minutes and resolutions, which record all important corporate decisions and the votes taken to approve them, helps greatly to defuse all of these problems. Quite simply, your first and best line of defense against losing the protection of your corporate status while helping to ensure continued harmony among your directors and shareholders is to document important corporate decisions by preparing and maintaining adequate corporate records.
Again: Minutes are the best evidence of the events or decisions they record.
The article suggests there is a simple fix for this problem.
Minutes of meetings are easy to prepare and normally do not require the help of a lawyer or accountant. First, of course, you need to convene a shareholder’s or director’s meeting in accordance with the requirements in your corporate bylaws. Fortunately, this is usually easy to do. Next, clearly write out the decisions approved by your board of directors or shareholders by majority vote (the usual vote requirement for most corporate decisions). It is often easiest to do this using fill-in-the-blanks forms, since this really is a legal area where using standard legal language ” boilerplate” works well. Finally, place a copy of the minutes in your corporate record book.
But when to do this? And how does one know what is critical to cover in the meetings or the consents to actions recorded in the minutes of directors and shareholder proceedings?
The good news is that you don’t need to document routine business decisions — only those that require formal board of directors’ or shareholders’ approval. In other words, you are not required to clutter up your corporate records book with day-to-day business records, such as those for purchasing supplies or products, hiring or firing low- or midlevel employees, deciding to launch new services or products, or any of the host of other ongoing business decisions.
But key legal, tax, and financial decisions absolutely should be acted on by your board of directors, and occasionally your shareholders. What kinds of decisions should be considered key? The proceedings of annual meetings of directors and shareholders, the issuance of stock to new or existing shareholders, the purchase of real property, the approval of a long-term lease, the authorization of a significant loan amount or substantial line of credit, the adoption of a stock option or retirement plan, and the making of important federal or state tax elections — these, and other key decisions, should be made by your board of directors or shareholders and backed with corporate paperwork. That way, you’ll have solid documentation in the event that key decisions are questioned or reviewed later by corporate directors, shareholders, creditors, the courts, or the IRS.
Nicely stated.
The article ends with a good list of great reasons to document your key corporate acts and decisions in formalized meeting minutes and written consents (in lieu of calling and convening actual, physical, in-person meetings):
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Annual corporate meetings normally are required under state law. If you fail to pay at least minimal attention to these ongoing legal formalities, you may lose the limited liability protection of your corporate status.
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Your legal paperwork provides a record of important corporate transactions. This ” paper trail” can be important if disputes arise. You can use this paper trail to show your directors, shareholders, creditors, suppliers, the IRS, and the courts that you acted appropriately and in compliance with applicable laws, regulations, or other legal requirements.
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Formally documenting key corporate actions is a fail-safe way of keeping shareholders informed of major corporate decisions.
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Directors of small corporations commonly approve business transactions in which they have a material financial interest. Your minutes or consent forms can help prevent legal problems by proving that these self-interested decisions were arrived at fairly, after full disclosure to the board and shareholders.
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Banks, trusts, escrow and title companies, property management companies, and other institutions often ask corporations to submit a copy of a board or shareholder resolution approving the transaction that is being undertaken, such as a loan, purchase, or rental of property.
I agree. Concise, easy to understand, and a good read.