Courts have long recognized that a corporation is an entity, distinct and separate from its stockholders and officers, and the individual stockholders are not responsible for the debts of the corporation. This idea of “limited liability” for shareholders has been broadly applied by the courts, even when all the stock in a corporation is owned by one person and where the corporate structure has been used for the sole purpose of avoiding personal liability.

However, there are some circumstances where the corporation may be disregarded as an entity standing between its owners and adverse parties. This legal theory is known as “piercing the corporate veil” and is a justification for disregarding the corporate entity. Most courts use a “totality of the circumstances” test in deciding whether to pierce the corporate veil and, therefore, each case must be decided on its own facts. Numerous factors have been identified as relevant in making a determination of whether the separateness of the corporation and the individual shareholders should no longer exist. One factor considered by the courts is the failure to follow corporate formalities. This important factor is usually considered when courts are describing corporations metaphorically as the “alter ego” or “instrumentality” of the shareholders since the shareholders themselves will be personally liable for the debts of the corporation. The basic premise of this factor is, simply stated, if an organization is going to be a corporation, it ought to act like one. Several courts have stated that if shareholders wish to have the protection of a corporation to limit their personal liability, they must also follow the simple formalities of maintaining the corporation.

Though corporate law varies from state to state, most state laws and the corporation’s own bylaws require that a corporation hold an annual meeting of shareholders where, at a minimum, the directors of the corporation are elected annually.  Most state laws and the corporation’s bylaws require an annual meeting of the Board of Directors which usually occurs on the same day as the annual shareholder’s meeting.  The annual directors meeting usually results in the election of officers of the corporation for the following year. Corporate minutes are the official records of corporate matters acted upon in a corporate meeting.  Each year business owners who have a corporation will want to ensure that their annual minutes are prepared and that every meeting is documented with minutes.

In many states, if there is only one shareholder or if all shareholders are cooperative, there are alternative methods which can be used to meet the legal requirements for valid meetings and appropriately authorized corporate actions. When there are several shareholders having disagreements, following the rules for holding corporate meetings and maintaining minutes of meetings is imperative. Corporation owners who keep annual written minutes have taken one step in complying with corporate formalities. Merely keeping annual written minutes is not a guarantee that the corporate veil cannot be pierced. However, corporation owners who are diligent in having written minutes of corporate meetings prepared and filed in the corporate minute book will have complied with one of the corporate formalities, thereby helping them to avoid becoming personally liable for their corporation’s debts.

It is easy to forget about annual meetings and corporate minutes in running a business. Minutes may be required in the event of an Internal Revenue Service audit or other governmental inquiry. Minutes may also become a condition to the corporation obtaining a loan from a bank or some other desirable benefit. Finally, minutes can become vital in the defense of a lawsuit.

A New Year Resolution should be made that proper corporate minutes will be maintained. Maintenance of proper minutes may be well worth the cost, even where the corporation consists of a single person.

Please feel free to contact us if you have questions regarding annual meetings and corporate minutes.