How many of you who own or manage corporations maintain your minute books (or even know where your company's minute book is)? Do you bother to file your annual reports? Do you know if you have a registered agent? If you answered no to these questions, you're not alone.
Many corporations, both large and small, frequently fail to follow the basic legal formalities imposed on them. While such legal "technicalities" may not seem all that important, you should be aware that neglecting the basic corporate formalities could potentially impair the financial success of your business. Worse yet, it could also impact your personal, non-business assets.
Articles of Incorporation Are Required
As a starting point, your corporation must have articles of incorporation (or a similar document if your corporation was not formed in North Carolina) to be properly organized. In addition to the articles of incorporation, you also need, at least in this state, a set of bylaws.
Typically, the bylaws set the time for annual meetings, establish certain officers and otherwise regulate the method for governing the corporation. While the articles of incorporation are publicly filed with the Secretary of State, the bylaws are private documents. Both may be amended any time.
Registered Agent
Unfortunately, it's not enough to simply have articles of incorporation and bylaws. A corporation also needs a registered agent, a board of directors and officers. Your articles of incorporation should name the registered agent, but if your registered agent resigns or you select a new registered agent, you will need to notify the Secretary of State of the change.
Officers and Directors
The most important representative of your corporation is its board of directors. There can be as few as one director on your board, but you will need to make sure that the number of directors sitting on your corporation's board matches the number established in your bylaws.
In addition to a board of directors, your corporation also needs officers, such as a president, a secretary and a treasurer. These officers should be created in the bylaws. You will also need to keep an eye on the actions of the officers to make sure they are acting in compliance with their duties as laid out in the bylaws.
Right now you are probably thinking that you have got a handle on your corporation. You have articles of incorporation and bylaws, a board of directors and officers, heck, you even have a registered agent (though you may not know exactly what he or she does). Well, you are not out of the woods yet.
Corporations Act in Manner Prescribed by Law
One of the more frequent problems for the owners and managers of corporations is ensuring that the corporation "act" properly. A corporation, as a creature of law, not nature, can only take action in matters outside its ordinary course of business in the manner prescribed by law. Essentially, a corporation can only act through its board of directors, officers and shareholders.
Shareholders
For instance, the shareholders of your corporation can only act in two ways: (i) by properly called meetings; or (ii) by unanimous written consent. As for the meetings, the shareholders are required, at least in North Carolina, to have an annual meeting each year. The date of this meeting should be established in the bylaws of your corporation. At the annual meeting you and your fellow shareholders will elect directors and conduct other appropriate business.
Directors
The directors in your corporation, not unlike the shareholders, will also act either by properly called meetings or by unanimous written consent. If you are a director of a corporation, you will generally only be required to act in order to elect officers or to approve certain actions of the corporation outside of the ordinary course of business (e.g. issuing shares of stock, approving contracts for the purchase of a business, etc.).
Corporate Actions Recorded in a Minute Book
In the case of action by either the board of directors or shareholders, whether by written consent or meeting, you will need to make sure that the actions taken are clearly set down in writing, signed by the appropriate people and placed in the corporation's minute book. We often find incomplete records to be a major problem for many corporations.
As a general rule, officers, unlike shareholders and directors, don't need to act as a group or at a meeting. However, it is very important that the officers of your corporation act in conformance with the provisions of bylaws of the corporation.
Annual Reports and Tax Returns
Another problem area for corporations is filing certain documents. Under North Carolina law, a corporation is required to file documents such as an annual report and a franchise tax return. However, all too often, many corporations fail to file these reports and returns.
Consequences of Corporation Not Operating Properly
"O.K.," you say, "you got me, I don't follow all of these formalities." "Look," you explain, "my business is still operating, suppliers are still supplying me with inventory and my customers keep buying my goods, not following these rules appears to be risk-free." Unfortunately, you may find the consequences of failing to comply with these corporate "formalities" severe.
Corporation Can be Dissolved by Secretary of State
In North Carolina, your corporation can be administratively dissolved by the Secretary of State for, among other things, failing to timely file its annual report, conducting business without a registered agent for more than sixty days, or changing its registered agent or office and failing to notify the Secretary of State within sixty days of such change. If your corporation is administratively dissolved, it cannot undertake any new business.
Liability Protection May Go Away
In addition, failing to follow properly the above "formalities" could subject you, if you are a shareholder, to personal liability. Simply put, creditors of the corporation could, in certain circumstances, directly proceed against you and your fellow shareholders for any liabilities of the corporation.
Failure to Maintain Records Can Delay Company Business
Finally, the failure of your corporation to observe properly the corporate formalities, such as maintaining the minute book with up-to-date bylaws, minutes of meetings, and actions by written consent, can impair and delay its ability to engage in transactions involving the purchase or sale of assets or stock or in a merger or business combination. These consequences could cost you a lot of money.
Maybe an LLC is a Better Choice of Entity
If you feel like you are too busy to keep up with the details of complying with the corporate formalities (after all, you're running your business!), there may be an alternative for you: the limited liability company or LLC. This organization combines the limited liability benefits of a corporation with the tax benefits of a partnership or sole proprietorship. In addition, there are fewer formalities with which the owners of an LLC, known as "members," must comply.
For example, an LLC is not required to conduct annual meetings, elect directors or officers. LLCs do need to file articles of organization, the documents by which they are formed, and annual reports. However, the information required in the articles of organization is fairly minimal. Keep in mind that there may be many good reasons why you do not wish to use an LLC to operate your business, but it is a form to keep in mind if you want to lessen some of the administrative burdens on your business.
Conclusion
Ultimately, regardless of the form of organization you are operating, be it an LLC or a corporation, it will need to stick closely to the requirements imposed on it by the law. If you fail to do so, you may find the financial side of your business is dampened by the costs, in both time and money, of attempting to correct the situation and address its consequences.