Some decisions, referred to as corporate resolutions, require that both shareholders and the board members vote on them and the outcome of the vote is noted in corporate minutes. The rules governing corporate resolutions are fixed by state law. If these rules are not followed, the intended results from the resolutions are not valid.
Roles in Corporate Decisions
There are different legal roles people traditionally play in the corporate decision-making process: shareholder, director, officer, and employee. For many small businesses, the corporation is organized with only one or two owners playing all the roles.
Shareholders own stock (often referred to as shares or ownership interests) in the corporation. State laws typically require the shareholders to hold an annual meeting. However, Delaware, like many states, allows shareholders to do this through a “written consent” or “consent resolution” – a document signed by all of the shareholders – instead of a face-to-face meeting.
The board of directors will generally set policy for the corporation and make major financial decisions. Delaware, like many states, requires directors to hold regular meetings. Delaware even allows for board of directors meetings to be held through telecommunications. Many states have followed and streamlined the procedures for operating a small corporation, permitting owners to make decisions quickly, without jumping through needless procedural hoops.
While the organizational structure of corporations separates the rights and duties of shareholders and directors, this separation is not much of an issue for small corporations because most shareholders are also directors and officers. Nevertheless, even if you are playing all the roles you must still observe the formalities required by law, which means serving in more than one capacity at different times. For example, sometimes you will sign a document in your capacity as director; at other times, sign as a shareholder.
Officers are responsible for the day-to-day operation and management of the corporation. State laws usually require the corporation to have at least a president, a secretary, and a treasurer. However, Delaware has traditionally allowed the same person to hold all of the required offices.
With many small corporations, the owners are also the employees of the corporation. Owners of small corporations receive most of their financial benefits through a salary received as corporate employees.
Documenting Corporate Decisions
Corporate minutes should be used to record every corporate decision. You don’t need to document every routine business decision, however, you should prepare written minutes or consent resolutions for events or decisions that require formal board of director or shareholder participation. These typically include:
- The proceedings of annual meetings of directors and shareholders
- The issuance of stock to new or existing shareholders
- The purchase of real property
- The approval of a long-term lease
- The authorization of a substantial loan or line of credit
- The adoption of a stock option or retirement plan, and
- The making of important federal or state tax decisions.
By documenting important corporate decisions, you can protect your limited liability status, and you will have solid documentation if key decisions are later questioned by the courts, creditors, or the IRS. In addition, keeping good corporate records allows you to note the reasons for making critical decisions which can head off controversy in the future.
Please take note of the following examples:
Retained earnings example
C Corporations that want to amass funds for future projects rather than distribute earnings currently to shareholders should use corporate minutes to reflect the reason for accumulating earnings. Why? The tax law imposes a penalty on excess accumulations, which are earnings over a set limit ($250,000, or $150,000 for personal service corporations). However, to the extent earnings are retained for specific reasons explained clearly in corporate minutes, the penalty can be avoided if the accumulations are reasonable. For example: if funds are being accumulated to purchase property or to buy out the interest of an owner who is about to retire, the penalty will not be imposed as long as there is a record of this purpose and the amount of the set-aside funds is appropriate for the reason.
Record retention example
We are often asked, “How long do I need to keep records?” When it comes to corporate minutes, our best advice would be – it is always a good idea to keep corporate minutes indefinitely so they are available for inspection by shareholders, government officials (such as the IRS) and others entitled to such access. For example: if the corporation adopts an “accountable plan” six years ago under which it will reimburse employee expenses in such a way that no income results to the employees, the adoption of this plan should be included in the minutes, just in case the IRS has questions. Even if you dissolve your corporation, at a minimum, you should retain corporate minutes for at least 7 to 10 years. In addition, as with all critical documents, keep the minutes in a safe location, such as a safe deposit box. If they are stored on a computer, be sure to have adequate back-up protection.
Corporate Minutes Made Easy
Writing corporate minutes is actually a simple, straightforward process. Basically, keep detailed notes at the meeting and write them up more formally as soon as possible after the meeting. Since corporate board of directors should meet at least annually, minutes should be updated at least once a year. However, if additional actions are taken during the year, minutes should be made at that time. Discard any notes taken at the meeting after you have prepared the formal minutes. Your notes may not correctly depict the outcome of issues. Also, don’t try to transcribe everything that was said at the meeting; a brief summary will suffice.
There is very user friendly software available that does the whole process for you. Also, there are excellent books which supply easy-to-read instructions on how to comply with state law requirements and IRS rules, including a CD with corporate forms.