What are Corporate Formalities - Part 2?

My last blog article referenced Corporate Formalities and was good food for thought for many of us "typical business owners". The bottom line for most of us is that we have so many things that need our attention that it is virtually impossible to keep tabs on everything (thus our need for help). I'd like to take a moment to look a little more closely at Corporate Formalities and some specifics:

• Accounting Practices are a very important aspect. It is paramount that you have separate bank accounts for your business (separate from personal accounts). If you are like many business owners you may own multiple companies. You must have a separate account for each entity and keep separate, and accurate, financial records.


• Business Expenses need to be tracked and accounted for properly. You should never pay personal expenses out of a business bank account and if you do pay business expenses with personal funds, be sure to record it in the company records or submit an expense report. If you are a multiple business owner, as referenced above, be sure that you are not paying the expenses for one company from a different company's account. This would be considered co-mingling of funds, which is a felony.


• Corporate Records are different from accounting records. Corporate Records include your Articles of Incorporation, ByLaws, Meeting Minutes, Stock Certificates, Stock Ledgers, etc. It is very imporant that a detailed, organized Corporate Record Book is kept and updated regularly. This means regular reviews and review documentation is crucial and if you have read my blog in the past, you are well aware that I have covered this extensively.


• Government Filings are another important matter to be aware of. In addition to making sure that tax returns and financial records are addressed, you also need to make sure that your annual filing requirements are made at both the state, and federal, government levels.

There are additional components of Corporate Formalities, perhaps I will cover them next time???

What are Corporate Formalities?

If you are like most business owners I know, you have way too many things on your plate and way too few hours in the day. So when you hear terms such as "Corporate Formalities", it is understandable if it's in one ear and out the other. So what exactly are Corporate Formalities and why are they important? The answer to the first question is fairly short and sweet, but the answer to the second... not so much.

• Corporate Formalities are simply the actions that a business owner performs to demonstrate separation between the business entity (and its assets), and his/her personal activities and assets. Conducting regular reviews, proper documentation of reviews, meeting filing deadlines, keeping complete financial records, detailed meeting minutes, adherance to the corporation's bylaws and other governance requirements... are all key components in observing Corporate Formalities.


• The Reason Corporate Formalities are important is that in order for a business owner to be fully protected personally by their Corporation or LLC, practicing Corporate Formalites on a regular basis is an absolute must.


• Sadly, the failure to properly observe Corporate Formalities is one of the most common misteps amongst business owners, and potentially one of the most costly.


• Failing to observe Corporate Formalities is essentially stating that there is no separation between the business itself, and you, the owner, as well as all of your private assets. If there is no demonstration of separation, the main purpose of the entity is completely negated and the business owner is left exposed, and at risk.

Who is making your required filings?

All businesses have regular filings that must be made, but who is actually responsible for making them?

• "I think my CPA is handling this for me" you might say. This is a very popular answer to the question, but it isn't necessarily a good one. Some CPAs will take care of filings for you as a value add to their traditional services. However, assuming that they are doing it for you can be a costly mistake.


• "My attorney takes care of all of those details for me" is a common thought. Are you serious? I am surprised at how often I receive this type of response, particularly since it is almost never true. Attorneys generally do not handle annual filings unless you are paying them a monthly retainer or other type of regular management fee.


• "I don't have time to deal with that so I am not going to worry about it" might be your first thought. While you may not have time to deal with it, you better believe that you should be concerned about it because it is ultimately YOUR responsibility. This doesn't mean that you have be the one to do it yourself, but you definitely need to make sure that it is taken care of (on time).


• "So if it is my responsibility, what happens if I don't do it?"This is not necessarily a short answer as there are a number of possible repercussions. At the very least, your business will be placed on Inactive Status with the Secretary of State's office and you are no longer considered to be in Good Standing. You can file for reinstatement, which will require a fee, but reinstatement is not guaranteed. Once you are placed on Inactive Status, it is possible for someone else to form an entity using the same name that you have operated with.

You may also want to consult with a professional advisor as there may be other filings or required certifications that may need to be addressed (depending on your business type).

What is a "Major" Purchase?

'Major Purchases' may be a relative term, but documenting them can be crucial for your business:

• What constitutes a "major purchase" for a company?

A major purchase generally depends on the size and scope of the business.  For larger companies a major purchase might be a property/building, new vehicle, or expensive equipment.  For smaller companies a major purchase could be anything over a few hundred dollars such as a new laptop computer or printer.  It is also a good idea to document travel expenses such as air fares, hotel accommodations, etc.

•  Why is it important that companies document decisions around a "major purchase"?

Proper documentation of major purchases is essential in creating a paper trail substantiating the financial decisions of the officers.  By formally documenting these actions and decisions, the business owner is taking the necessary steps to perform corporate formalities (the actions that demonstrate personal and corporate separateness).

• What kind of documentation is recommended before/during a major purchase?

It is important to document the date of purchase, the cost of the purchase, and a description of the purchase.  Copies of purchases agreements, settlement statements, loan/lease agreements should be attached to the formal resolutions as exhibits that are referenced in the resolution.

• What are the ramifications of NOT documenting 'Major Purchases'? 

         The biggest issues that I have seen involving insufficient documentation of major purchases has been  regarding inadequate business valuations because the value of equipment and other assets could not be  verified.  This has also caused problems with insufficient insurance coverage or the failure to pay claims  because the business owner could not substantiate the purchase.  This also raises red flags in regards to comingling of funds.  It is a very common practice for business owners to pay for “personal expenses” utilizing company funds.  When major purchases are properly documented, it eliminates any ambiguity surrounding comingling of funds.

Write Offs or Waste of Time?

We've covered the big questions about Annual Meetings, but here are three other questions we get every so often.  Hopefully you'll feel like an expert about Annual Meetings after reading these three blog posts!

·        Can I really go on vacation and call it my “Annual Meeting” in order to write it off?

Yes . . . and No.  Don’t buy the plane tickets for your family to fly to Fiji just yet!  Conducting a business meeting while on vacation does allow for certain write offs of business expenses on taxes. However, you should consult with your CPA to determine which expenses can be written off as legitimate business expenses. Typically, the write off isn't as exciting as you'd hoped . . .

·        Who looks at this stuff anyway?  It seems like such a waste of time!

Like most things with details and the government, a little work up front saves you a lot of pain in the long run.  As for who should look at the Annual Meeting documents: the business owner should review the documents regularly and government auditors will certainly ask for the completed Corporate Record Book if (or when) you are being audited. 

There are other people important to the future of your business who will want access to your Annual Meeting Minutes and Corporate Record Book! Banks should (and often do) review these documents to assess the risk of lending to your business.  Your insurance or risk management advisor should also be reviewing the documents often to ensure they are covering your business’ needs.

·        If we grow, do I need to include more people in the meeting?

Who is included in the meetings is entirely up to the ownership/management group.  All Shareholders and Directors should attend, as well as any outside advisors that the business ownership group would like to have present.  Ad your business grows, you may add Shareholders or more likely additional Directors.

Going Retro

Not holding Annual Meetings is definitely a common theme for small businesses, but it is critically important to keeping the corporate sheild in tact.  Once a small business owner understands the risks involved in NOT holding (and documenting) Annual Meetings, they start to panic a bit, "Okay, so now I understand why we “Should” hold an Annual Meeting, but I haven’t done it since we opened!  What now?".   This is a case where going Retro can work in your favor . . .

·        It’s been 5 years since  . . .isn’t it too late?

Start today and move forward.  Because it’s overwhelming, most businesses in this situation are likely to turn to an advisor. Regardless, it is never too late to get started.

·        Can I retroactively hold meetings for the last 5 years of not having meetings?

Yes, provided that you sign and date all documents currently so that you are not acting in an unethical manner.  You are simply stating that while these decisions were made in the past, you simply got around to documenting them recently. It's not as ideal as having Annual Meeting documents from each year, but it's much better than being audited without any documentation in place. So, you CAN go Retro (minus the liesure suit) as long as you aren't falsifying documents. 

Begin A New Holiday Tradition: The Annual Meeting

'Tis the season for Giving Thanks, signing Christmas Cards, and . . . Strategic Planning!  Most businesses have at least an informal planning process that happens between now and January.  This planning process is actually a great time to begin the tradition of your corporate Annual Meeting!  

"Okay, but I don’t REALLY need to have an actual Annual Meeting, right?"

If you’re an owner-operated business, it’s likely that you’ve slacked-off a bit in holding and recording your required Annual Meetings.  This is especially true when the shareholders include you and . . . just you! Regardless of how small (or large) you are, you are required to hold an Annual Meeting and have documentation of those meetings. 

An Annual Meeting is a review of the previous year’s business activities by the Board of Directors and Shareholders of a Corporation or the Board of Governors and Members of an LLC.  Conducting regular reviews of all business activities and properly documenting these reviews is vital to maintaining personal and corporate separateness.  In short, the Annual Meeting is a key piece of armor in protecting the integrity of the Corporate Veil.

Over the next few blogs, I’ll answer common questions about Annual Meetings. Today, we’ll cover meeting logistics:

·        What is typically included in an Annual Meeting?

A regular review of business activities and will differ from business to business.  Some examples of review items include:

Re-appointment of Directors or Governors and re-election of Officers

Approval of Major Purchases

Approval of any new loan or lease agreements

Changes to compensation or benefit packages

Approval of change of office address request

Decisions around locations and branches

Approval of authorized agent activities (CPA, Attorney, Insurance Broker,

Banker, etc)

·        What should the minutes look like?

Minutes should contain very specific language with formal resolutions that are confirmed, approved and ratified.  The typical business owner is usually unfamiliar with the type of language and structure that formalized documents should contain—an experienced advisor can assist in this area. However, I’ll also post a few examples of Annual Meeting minutes to give you an idea of what is included.

·        Where do I keep the minutes?

Every business is required to keep a Corporate Record Book and it is to reside at the principal office of the business.  This Book can be physical, or virtual, provided it is available or can be accessible at the registered office location.

·        What kind of evidence should there be meeting?  Are minutes enough?

The minutes of the meeting are certainly important in proving that a meeting occurred.  You can also keep copies of the meeting agenda and the waiver of notice, as well as any receipts for expenses associated with the Annual Meeting.

 In the next blog, I'll cover the question we get asked all the time: "So, I've been in business for five years and have never held an annual meeting . . . now what?"  There are effective solutions for this common corporate issue!  Stay tuned . . .