Corporate Minutes


Corporate Minutes

Overview

Many people delay forming a corporation because of fears they'll be spending more time in required corporate meetings and preparing minutes than running their business. These fears are completely unfounded. In a small business corporation in particular, no corporate meetings need be held for any purpose and, while minutes must be prepared, they are needed only to document important activities and should not take more than a few hours each year.

The term "corporate minutes" will be used to refer to written minutes that are prepared to document activities in both corporations and LLCs. In the same respect, for purposes of this topic, the term "corporation" should be interpreted as including an LLC unless noted otherwise.

Much of the reason for the misconceptions is that corporate statutes in every state provide very little information about the types of activities that a corporation must or should document in written minutes and the form in which written minutes must or should be prepared.

One of the only statutory requirements is preparing written minutes for the annual election of directors in a corporation. This requirement doesn't apply to an LLC because it has a different structure. There are rarely any other statutory requirements for preparing minutes for specific activities of a corporation; only a general requirement that a corporation shall keep adequate records of its activities.

All states permit corporate actions to be approved or authorized without a meeting actually being held. These are called "written consent minutes" and simply describe the action being proposed, the reason for the action, and authorize or approve the action based on the signatures of either all or the required majority of directors, shareholders or members.

It is important to have written minutes for two reasons: (1) they are essential for maintaining the limited liability protection in a corporation and may be important for the limited liability protection in an LLC as well, and (2) they serve an important function for tax audit purposes for both corporations and an LLC.

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FAQs

Why is a corporation required to prepare written minutes?

The law treats a corporation as a separate legal and tax entity from its owners. This provides the owners with limited liability protection and certain tax advantages, but only if the owners treat the corporation as a s eparate entity in which actions are taken by the owners acting in their capacity as a shareholder and generally also as a director. Written minutes record actions taken in these capacities.

What are the consequences if minutes aren't prepared?

A main objective of forming a corporation is the advantage of limited liability protection. This protection can be lost if a court "pierces the corporate veil" and holds shareholders personally liable for corporation debts and obligations. One factor courts review in making this determination is whether corporate formalities, such as keeping minutes, have been followed.

How often is a corporation required to hold meetings?

Contrary to a widespread misconception, a small business corporation is never required to hold a meeting to take or approve action. Every state has corporation laws that allow a corporation to take action without a meeting if all, or a required majority, of the shareholders or directors simply signs written minutes indicating their consent to the action.

Are minutes required for a corporation with just a single person or husband and wife?

Yes. They enjoy the same advantages of operating through a corporation as anyone else and must also adhere to the same corporate formalities, such as keeping written minutes. Again, no meetings are required. They typically prepare written consent minutes without any meeting.

What types of activities should I record in minutes?

The universal minutes required for every corporation (except a nonprofit that doesn't have shareholders) is the annual election of directors by the shareholders. State corporation laws often require minutes for certain other events like a corporate merger. With few exceptions, it is left to each corporation to determine the activities that it will record in written minutes. As a general rule, all financial activities that may have tax implications should be documented as well as any major changes in the corporation, such as removing or adding directors or officers, changes in shareholders, changing the corporation name or the nature of its business. Entering into significant agreements such as an office or warehouse lease, equipment or vehicle lease, real estate purchase, etc. should be recorded in written minutes.

Ordinary, every day activities of running the business need not be recorded in corporate minutes.

Is there a special format for preparing minutes?

There is no required legal format, but there are commonly used and accepted formats. If a meeting has actually been held, there is an initial requirement to either prepare a notice of an annual or special meeting or a waiver of such required notice. The actual minutes must indicate who was present and absent, the action voted upon and the vote count.

Who will ask to see my minutes?

In many cases you'll never be asked to see your corporate minutes. This may lull many people into procrastinating in keeping up with maintaining corporate minutes. That's a dangerous practice because the two most common circumstances where corporate minutes will be requested are in lawsuits involving the corporation and tax audits. The failure to have minutes pertaining to an important activity, or any minutes at all, could have dire consequences.

When should minutes be prepared? How often and how close to an activity occurring?

Other than the required annual minutes for the election of directors, the necessity and frequency of preparing minutes will depend on the activities of the corporation. If no important financial activities have occurred (no bonuses paid, loans made or received, no employee benefits adopted, etc.) and no important agreements have been entered into, etc., there may be no need to prepare any additional minutes.

When minutes are required, they should be prepared within a reasonable time after the action or activity that is recorded in the minutes for a couple of reasons. As a practical matter, if months or years have passed, it may be difficult to recall the transaction at all or at lease the details necessary to make the minutes meaningful.

Secondly, in order to be accepted as a "business record," minutes must be prepared within a reasonable time period after the event they are documenting. Otherwise, they could be rejected by a court or a taxing authority. The classic case is where a corporation prepares several years of minutes just prior to an audit. All minutes on nice, clean, new paper with signatures that are barely dry.

Is an LLC required to keep written minutes like a corporation?

An LLC is excused by many state laws from preparing certain written minutes. There is no requirement for minutes of an annual meeting, as in a corporation, because an LLC doesn't have shareholders who are required by law to conduct an annual election of directors. Some state laws may also contain a general provision stating that an LLC is not required to hold any meetings unless specifically required in its Articles of Organization or written operating agreement.

State laws are not binding on federal taxing authorities and written minutes may serve an important purpose in the event of a tax audit just as they would with a corporation.

I get notices from companies that provide an "annual minutes" service. Will that satisfy my requirement for keeping minutes?

There has been a proliferation of companies with official sounding names like "Corporate Compliance Center"& or "Board of Resolutions and Minutes" that regularly mail notices to corporations regarding corporate minutes. These notices typically appear to be sent by a governmental agency, quote corporation statutes requiring the preparation of annual minutes (i.e., the annual election of directors) and caution the recipient that they must act by a certain date or risk having their corporation suspended or losing their limited liability protection. They offer to prepare these "annual minutes" for a fee of $125 to $200.

These companies are not governmental agencies. In fact, they have been sued by the attorney generals in many states for false or misleading solicitations. Read the fine print. If you receive a notice and it is not from the Secretary of State (or other formation agency designated in your state), check with your state agency before you act.

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