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Are Your Corporate Minute Books up to the Minute?

September 15, 2015

For a business, corporate minute books are sometimes treated as a book-end on the bookshelf, collecting dust, or perhaps even MIA. That is far from how it should be treated. Corporate minute books may be the best evidence a shareholder can produce to assert his or her right to be personally protected from liability for corporate debts and obligations. As such, that minute book needs to be regularly updated and reviewed, or the corporate officers responsible for maintaining the minute book themselves could be liable to the shareholders.

One of the major factors that undoubtedly influenced your decision to operate your business as a corporation was a desire to shield the personal assets of the shareholders from liability for the debts and obligations of the business. You probably wanted to ensure that creditors of the corporation would not be able to seize the homes and brokerage accounts of its shareholders if the corporation is unable to pay its bills or is sued for an amount in excess of its insurance coverage. How well that corporate shield works, however, may be determined by how well the corporate minute book is maintained.

A shareholder is shielded from liability for corporate debts and obligations if the corporation is truly a separate entity. It becomes a separate entity when it is formed by a filing with the Department of State and other required statutory actions are taken. Be aware, it is not enough to simply form a separate entity – it must be treated as such by the shareholders. The evidence necessary to prove you have treated the corporation as a separate entity can be found in the corporate records, including the minute book and bank accounts.

If you are now concerned about the status of your corporate minute book, you may be wondering what needs to be included in that corporate minute book to preserve the corporate shield for shareholders year after year.

The minute book should be the official history of the corporation. It should have the formation documents – the Articles of Incorporation, the EIN application, the S-corp elections (if filed), the Bylaws, the share ledger indicating issuance and transfer of shares of stock, and other documents filed at the time of formation. If any amendments to any of those documents were filed subsequent to formation, those amendments should also be a part of the corporate minute book. For example, if the official address for the corporation is changed, the Department of State must be notified by filing a Change of Registered Address, and a copy of that filed document should be in the corporate minute book.

To prove the corporation has been treated as a separate entity year after year, however, the minute book should also contain, of all things, minutes – minutes of meetings of the Board of Directors and meetings of shareholders at which corporate decisions have been made. The law requires that there be at least an annual meeting of shareholders and an annual meeting of the Board of Directors. The law also permits the shareholders and directors, if they all agree, to approve corporate actions in writing, instead of having meetings to approve those actions. These so-called consents can be adopted annually instead of having annual meetings. Thus, if you are the sole shareholder and only director of a corporation, you don’t have to meet with yourself, or even pretend that you did. Instead, you can act by regularly prepared written consents filed in the corporate minute book.

Whether in meeting minutes or in a consent, there should be an annual listing of all actions which required or will require shareholder or director approval, and a statement that those actions were approved or are being approved in advance. The minutes or consent should reflect the date adopted and, if minutes, signed by the secretary. If the approval is contained in a consent, the consent must be signed by all shareholders or directors, whichever is approving the action.

The next question I can hear you pondering is what actions require shareholder or Board approval. Think about your photo albums. You want pictures to evidence important events – births, weddings, birthdays, anniversaries, reunions. You may take a picture on your son or daughter’s first day of school, but I doubt you take a picture as they leave for school each and every day of the school year, year after year. The same philosophy holds true for the corporate minute book.

Normal day to day activities should be taken by the officers of the corporation, without the need for Board of Director or shareholder approval. Actions outside those normal day to day activities, however, typically require approval by the Board of Directors, either at a meeting or in a consent. And, actions affecting the future existence of the corporation (for example, a merger, dissolution, or sale of all or substantially all assets), typically require shareholder approval. For example, if the corporation is selling a piece of real estate, the sale should be approved by the Board of Directors. If that piece of real estate is the sole or major asset of the corporation, however, it is the shareholders who should approve the sale, typically after the Board has reviewed the terms of the sale and made a recommendation to the shareholders.

In addition to documenting the unusual, however, the law anticipates that the shareholders will annually elect a board of directors. Thus your minute book should contain minutes of an annual meeting of the shareholders (or a shareholder annual consent) electing the Board of Directors. The law also anticipates that the Board of Directors will elect corporate officers annually. Again, to indicate compliance with this legal requirement, the minute book should contain minutes of an annual meeting of the Board of Directors (or a Board annual consent) appointing the corporate officers. In these annual meeting minutes or annual consents, it is also typical to find the shareholders and directors ratifying all actions taken by the officers (in the case of the Board) or by the officers and directors (in the case of the shareholders) in the prior year, or since the last meeting or consent. This is the safety valve – if an action was taken without the appropriate approval, the approval is given after the fact, an action the law also permits.

Share ledgers are also an important historical reference in the corporate minute book that must be regularly maintained. When shares are issued, the share certificate should be completed and delivered to the shareholder, and the share ledger completed to reflect the issuance of the shares. If the shareholder later sells or gifts some or all of his or her shares, or the corporation redeems those shares, the share certificate must be returned to the corporation, marked as cancelled on the certificate itself and in the share ledger, and if a transfer, one or more new share certificates issued to reflect the transfer, and the share ledger updated to reflect the transfer. Someone looking at the share ledger should be able to accurately identify all of the shareholders of the corporation, the number of shares held by each, when they became shareholders, whether the shares were acquired from the corporation or from another shareholder, if any shares of that shareholder have been transferred or redeemed by the corporation, and if so, when the transfer or redemption occurred and the number of shares redeemed or transferred.

The above suggests regular actions that should be taken to ensure that your corporate minute book is up to date, and establish that your corporation is a separate entity, and not the alter ego of its shareholder(s). If you have any concerns about your minute book or what may need to be done to bring it up to date, please contact our office for assistance.

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