New Year’s Resolution: Maintain Corporate Compliance
For many, it’s not uncommon for a New Year’s resolution to last several days before it falls by the wayside and is completely abandoned. For business owners specifically, the turning of the calendar signifies an opportunity to stay updated and engaged in aspects of their business that, despite their best intentions, were forgotten about the previous year. One of the most common areas where we see business owners express an opportunity for growth is their ongoing corporate compliance.
What is corporate compliance?
For businesses organized as corporations (as opposed to LLCs), most states require strict compliance with statutory formalities, including (i) holding an annual meeting of the shareholders for the purpose of electing directors (see, e.g., California Corporations Code § 600(b)) and (ii) providing adequate notice to the other shareholders of such a meeting (see, e.g., California Corporations Code § 601). However, it should be noted that some states have “close corporation” statutes that relax some of the formalities applicable to corporations (see, e.g., California Corporations Code §300(b) authorizing shareholders to enter into shareholder agreements to modify the default rules of corporate governance).
In addition to the default requirements, other commonly discussed corporate formalities include: (i) memorializing regular meetings in corporate minutes, and (ii) preventing the commingling of corporate and personal funds. Remarkably, the preparation of corporate minutes memorializing regular meetings is one of the easiest, yet most neglected areas of corporate compliance.
Why is corporate compliance important?
Keeping corporate minutes is important because it is one of the factors the court evaluates when a judge is asked to hold a shareholder liable for the debts of the corporation (referred to as “piercing the corporate veil”). In fact, the Court in one of the seminal cases on the subject in California listed “the failure to maintain minutes or adequate corporate records” as one of the factors supporting the imposition of alter ego liability upon a corporation’s shareholders. (Associated Vendors, Inc. v. Oakland Meat Co. (1st Dist. 1962) 210 Cal. App.2d 825, 838.) Importantly, it should be noted that simply having an empty minute book will not likely be sufficient to protect the corporation’s shareholders from alter ego liability. (See Jacques, Inc. v. State Bd. of Equalization of Cal. (3rd Dist. 1957) 155 Cal. App. 2d 448, 459-60.)
Although it is the plaintiff’s burden to establish the alter ego relationship between the shareholders and the corporation, being able to present full and complete copies of meeting minutes is an important step in protecting the shareholders from personal liability. This is particularly important because most corporations “are formed to limit the liability of individual owners and to take advantage of tax provisions.” (Acco Contractors, Inc. v McNamara & Peepe Lumber Co. (1976) 63 CA3d 292, 296.) In other words, failure to keep updated corporate meeting minutes will make it easier for a plaintiff seeking to “pierce the corporate veil” and obtain a judgment against the shareholders, personally. Thus, to fully utilize the asset protection benefits of the corporate form, the shareholders and board of directors of the corporation need to ensure comprehensive corporate compliance.
How do I maintain my corporate compliance in 2017?
As simple as it may sound, a corporation should retain an attorney to assist with its’ ongoing corporate compliance. Most attorneys will provide their corporate clients with a checklist of important corporate actions that the shareholders or directors should be sure to record in the meeting minutes or other corporate resolutions. Once recorded, the secretary of the corporation should send the recorded actions to a business attorney for compilation into formal meeting minutes.
The New Year is an opportunity to change old habits and establish new behaviors moving forward. If you own a corporation, let 2017 be the year that you adopt new corporate compliance habits and protect your personal assets.