Tuesday, April 30, 2013

Protecting Your Corporation (Part 2)


This is the second installment in a three part series on how to maintain the protection of your corporation.

In our prior segment we talked about the consequences of failing to maintain proper corporate documentation, known as your corporate formalities. In a nutshell, the failure to do so makes it easy for your enemies/creditors to pierce your corporate veil and hold YOUpersonally liable for any actions taken by your corporation. Let's now examine what are the record keeping requirements/corporate formalities that the law says I must follow?

California law requires that certain of the business affairs of the corporation be approved by the shareholders.

     1.         Annual Meeting. California law requires that an annual meeting of the shareholders be held for the election of directors for the ensuing year and for other business that may come before the meeting.

     2.         Interim Meetings or Necessary Authorizing Resolutions. Apart from annual meetings, the following are examples of significant transactions which may occur throughout the course of the year which require an authorizing resolution by the shareholders:

(a)        Election/replacement of directors;
(b)        Amendment of Articles of Incorporation;
(c)        Transactions/agreements between the corporation and a director;
(d)        Loans made to an officer or director;
(e)        Indemnification of director, officer, employee or agent;
(f)         Sale/lease/transfer of substantially all corporate property outside the regular course of business;
(g)        Corporate reorganizations or dissolutions; and
(h)        Modifications or waiver of various shareholder rights or obligations under the Bylaws.

With respect to transactions which require action by the shareholders, such action may be taken at annual or special meetings of shareholders or by the written consent of shareholders without a meeting.


California law also requires that the business affairs of the corporation be managed and all corporate powers be executed by or delegated under the direction of the Board of Directors. In essence, the decisions pertaining to the day-to-day business operations of the corporation are made by its officers and management level employees. The directors are responsible for the policy guidelines under which the officers or management employees must act.

   1.         Annual Meeting. California law requires that an annual meeting of the directors be held for the purpose of appointing new corporate Officers (i.e., President, Vice President, Secretary and Treasurer) to represent the corporation during the current year and to approve and ratify the acts of its officers during the current year.

   2.         Interim Meetings or Authorizing Resolutions Needed. Apart from annual meetings, the following are examples of significant corporatetransactions out of the ordinary course of business whichrequire an authorizing corporate resolution
by the Board of Directors:

(a)        Changes in managerial work force;
(b)        Changes in compensation or bonuses to managerial level corporate employees;
(c)        Amendment of Articles of Incorporation;
(d)        Adoption of employee fringe benefit plans;
(e)        Purchase/sale of real property;
(f)         Leasing of new office space;
(g)        Purchase/lease of equipment or sale of equipment;
(h)        Corporate borrowing of money from financial institutions;
(i)         Loans made to or from corporate employees;
(j)         Transactions between the corporation & directors, officers or shareholders;
(k)        Indemnification of a director, officer, employee or agent;
(l)         Declaration of dividends or distributions to shareholders;
(m)       Acquisitions or modification of any corporate insurance program or policy;
(n)        Applications made to regulatory agencies;
(o)        Opening, closing or major remodeling of corporate business locations;
(p)        Purchase/lease of company vehicles;
(q)        Opening of new corporate bank accounts;
(r)         Hiring of legal counsel or tax and accounting professionals;
(s)        Filings made to transact business in another state;
(t)         Filing a Subchapter "S" election with the Internal Revenue Service; and
(u)        Documentation of capital invested into business by investors and issuance of stock certificates.

For transactions requiring action by the Board of Directors, the written record may consist of minutes kept at the meeting by the Secretary and approved by the Chairman of the Board. Alternatively, all directors may consent in writing to the action taken by the Board by preparing a signed resolution. The latter approach gives the directors some flexibility in those instances where a formal meeting cannot be held and where the action taken by the Board will be unanimous approved by all Board members.

Having drawn attention to what the corporate record keeping requirements are, the next question is what is the easiest way to accomplish this task to be compliant under California law?  We will address that question in our next installment.

To contact our office for assistance with your corporate record keeping, please call us at (949) 453-7979 or email us info@kleinlawcorp.com . Our staff is standing by to help you.

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