Operating Your Corporation
Now [that] you have your corporation properly and fully incorporated, your duties do not end there. All business entities require some ongoing formalities, responsibilities and administration. [Here's] how to perform the day-to-day operations and administration of your corporation.
Corporations must adhere to certain ongoing formalities in their internal governance and administration. Such formalities are required by state law and by the corporation's bylaws. Here are some examples of ongoing corporate formalities:
. Annual and special meeting must be properly noticed or participants must execute waivers of notice.
. Corporations must hold annual meetings of shareholders and annual meetings of directors, unless the corporation is a close corporation.
. Managers must prepare written minutes of all corporate meetings.
. Shareholder and director votes must meet quorum requirements.
. The removal of directors and officers must be effected by a proper vote.
. Directors and shareholders must respect the boundaries of conflicts of interest when entering personal transactions with the corporation.
Annual Meetings of Shareholders
The shareholders' single greatest responsibility is the election of corporate directors. The shareholders elect directors at each annual meeting of shareholders. The date for the annual meeting of shareholders is usually set forth in the bylaws. Some corporations prefer to have their shareholder meeting a few months after the end of their fiscal year. Thus, shareholders and managers may discuss the company's financial performance for the previous year.
Because the date for annual shareholder meetings is designated in the bylaws, no formal notice of such meetings is typically required. However, prudence dictates that a reminder be distributed to advise shareholders of the meeting. Annual meetings of directors can be held at the same time and place and should follow immediately after the shareholder's meeting.
A quorum of shareholders must be present in order to hold a valid shareholder vote. Quorum requirements prevent a small minority of shareholders from taking control of a corporation. Keep in mind that corporations may have multiple classes of shares-and some classes do not necessarily have voting rights.
Also, in connection with either an annual meeting of shareholders or a special meeting of shareholders, the directors will choose a record date, the date used to determine when an individual must own shares or units in a company in order to receive certain benefits from a company, such as dividend rights and voting rights. The record date is important for shareholders in publicly traded companies because shares are constantly changing hands.
State law typically dictates that a majority of the outstanding voting shares constitutes a quorum, but corporate organizers can reduce the number of shares that constitute a quorum by adding an appropriate provision in the bylaws. A provision reducing the quorum to 40 percent of outstanding shares would read, "The presence in person or by proxy of the holders of Forty Percent of the shares entitled to vote at any meeting of Shareholders shall constitute a quorum for the transaction of business." Bear in mind that the minimum allowable quorum will differ from state to state. For smaller corporations, the quorum should be set to a simple majority.
Special Meetings of Shareholders
A special meeting of shareholders is any meeting of the shareholders that is not a periodic meeting outlined in the bylaws, such as an annual meeting. Special meetings of shareholders may be called at any time. Special shareholder meetings, more often than not, are called in order to make changes to the board of directors-by removing the entire board, removing one or more directors, or filling a vacancy in the board. In order to call a special meeting, the following requirements must be met:
. The shareholder or shareholders calling the special meeting must collectively own a minimum percentage of a corporation's outstanding shares. The minimum differs from state to state; it is typically around 5 or 10 percent.
. Directors and officers may also call special shareholder meetings.
. The party calling the meeting typically issues a written document, a call, to the corporate secretary, who then is charged with the responsibility of noticing the meeting.
. Notice must be delivered to all shareholders advising them of the time and place of the meeting and of the proposals to be presented.
Appearance at Shareholder Meetings by Proxy
A proxy is an authorization by one member giving another person the right to vote the member's shares. Proxy also refers to the document granting such authority. Proxy rules are typically outlined in state law and a corporation's bylaws.
Proxies can state the period of time for which they are effective. If no duration is stated, the proxy will lapse automatically by state law. A proxy that states no duration remains effective for 11 months in California and three years in Delaware.
A proxy may either give the proxy holder absolute authority to vote the shares as he or she wishes or a long-form proxy may state the specific proposals for which the proxy is given. In some states, larger corporations require long-form proxies. The size that triggers the higher requirements differs from state to state.
Recording Shareholder and Director Meetings by Preparing Minutes
Annual and special meetings of shareholders and of directors must be recorded. The written record of the actions taken at such meetings is called the minutes. Minutes are very simple to prepare and are often quite short. Minutes of meetings should always contain the following information:
. The nature of the meeting, that is, whether it's a shareholder's or director's meeting, annual or special meeting
. That either the meeting was called by notice or that the persons voting waived such notice by executing a written waiver of notice
. Those present at the meeting
. The date, time, and place of the meeting
. The chairperson of the meeting
. Actions taken at the meeting, for instance, election of directors, issuance of stock, purchase of real estate, etc.
When in doubt, simply record the foregoing information in plain, conversational English. The person recording the minutes should sign the minutes, attesting to their accuracy. (There is no need to have each member sign the minutes.)
Holding Shareholder and Director Votes by Written Consent
Subject to certain restrictions, shareholders or directors may take an action without a meeting if their action is memorialized in a document called a written consent. A written consent is simply a formal written document that sets forth a corporate action to be taken and that is signed by the shareholders or directors consenting to the action. Some directors and managers find written consents to be invaluable-they are quicker, easier, cheaper, and more convenient. Actions taken by written consent do not require minutes, because the written consent itself serves as a memorandum of the action.
Written consents must be unanimous in some states for some corporate actions, such as the election of directors, the election to become a close corporation, or the amendment of the articles of incorporation.
A written consent should include the following information:
. The nature of the action taken, that is, whether shareholders' or directors' action
. A statement that the shareholders or directors taking the action waive notice of a meeting
. Actions taken, for example, election of directors, amendment of bylaws, election to be a close corporation, approval of stock option plan, purchase of real estate, etc.
. A signature line for each shareholder or director who contributes a vote to the action
When in doubt, simply record the foregoing information at the meeting in plain, conversational English.
Annual Meetings of Directors
Directors of a corporation should meet annually, whether or not required by law. The date for the annual meeting of directors is ordinarily set forth in the corporate bylaws. Typically, it follows immediately after the shareholder's annual meeting. At this meeting, the directors select officers to serve until the next annual meeting and can take any other necessary corporate action.
Because the date for annual director's meetings is designated in the bylaws, no formal notice of such meetings is typically required. However, prudence dictates that a reminder be distributed to directors advising of the meeting.
A quorum of directors must be present in order to effect a director vote. Quorum requirements prevent a small minority of directors from taking control of a corporation.
State law typically dictates that a majority of the directors currently serving constitutes a quorum, but corporate organizers can require a supermajority of directors to effect votes on particular corporate actions. A supermajority is a percentage higher than a 50 percent simple majority. For example, organizers can require that a unanimous director vote be required to dissolve the corporation or to approve a merger of the corporation with another entity.
Special Meetings of Directors
Like special meetings of shareholders, special meetings of directors may be called at any time. Because directors have ultimate authority over the management of a corporation, special meetings of directors may be called for any purpose. The procedure for calling such a meeting is as follows:
. Directors or officers have the authority to call special meetings of directors.
. The party calling the meeting typically issues a written notice, a call, to the corporate secretary, who then is charged with the responsibility of noticing the meeting.
. Notice must be delivered to all directors advising them of the time and place of the meeting and of the proposals to be presented.
Maintaining the Share Ledger and Transferring Shares
One of the most important records you'll maintain for your corporation is the share ledger. The share ledger, sometimes called a share transfer ledger or a stock ledger, is simply a registry indicating the shareholders of a corporation, the number of share each owns, and the transfers or other disposition of such ownership. A corporation should begin the ledger upon the formation of the corporation and should diligently update the ledger when shares are transferred, gifted, sold, or repurchased by the corporation or when new shares are issued.
Keep in mind that shares in any company are subject to comprehensive state and federal restrictions on sale and transfer unless such shares are registered with the Securities and Exchange Commission and state securities authorities. Registered shares are publicly traded shares that are sold in the public markets. So, if you sell shares in a nonpublic company, you must make sure you carefully follow the exemptions allowed by state and federal law. Unfortunately, a detailed description of such exemptions is beyond the scope of this book.
Annual/Periodic Reporting Requirements
Nearly all states require corporations to file periodic reports with the secretary of state's office or its equivalent department. A corporation files such reports in its state of incorporation and in states in which it is qualified as a foreign corporation. Some states, including California and Alaska, have recently relaxed their reporting requirements, moving to biennial filing of corporate reports (every two years). Annual report filing fees, due dates, late penalties, and information requirements differ from state to state.
Some states, such as California, Georgia and Arkansas, now offer online filing of periodic reports. We may reasonably expect that online filing will be offered by more states in the near future. Check the web site of the appropriate office of your state of organization to see if your state offers an online filing program.
Amending Articles of Incorporation and Bylaws
Shareholders may amend a corporation's articles of incorporation. They vote on proposed amendments either at an annual meeting of shareholders or at a special meeting called for that purpose. Alternatively, shareholders may approve an amendment by written consent. Any amendment to a corporation's articles of incorporation must be filed with the secretary of state and it will not be legally effective until the secretary of state accepts the filing. Some states require either a supermajority vote or a unanimous vote to approve particular amendments. The state's great area of concern is amendments that affect the rights of existing shareholders, such as amendments authorizing additional shares, which dilute the value of current shares.
Common amendments to articles of incorporation include the following:
. A provision changing the name of the corporation
. A provision increasing the number of authorized shares of the corporation
. A provision electing to make the corporation a close corporation
. A provision adopting an additional class of shares
Typically, both directors and shareholders enjoy the right to amend a corporation's bylaws. Some states place partial restrictions on the right of directors to amend bylaws; each state will differ. A corporation's bylaws will contain provisions outlining a procedure for amending bylaws. Because bylaws are not filed with the state, amendments to bylaws are not filed with the state. They become effective immediately upon their adoption either by the board of directors or by shareholders.
Common amendments to bylaws include the following:
. A provision increasing or decreasing the number of directors
. A provision changing the date for the corporation's annual meetings
Ending the Life of Your Corporation: Dissolution
A corporation has a perpetual life unless that life is cut short by dissolution. A dissolution is the process of shutting down a corporation, settling its affairs, paying its creditors, distributing its remaining assets to its shareholders, and ending its life. A dissolution may be one of three types.
1. A voluntary dissolution is the intentional dissolution of a corporation by its own management.
2. An administrative dissolution is a dissolution ordered either by the secretary of state or equivalent department or by other authorized state official.
3. A judicial dissolution is a dissolution ordered by a court of law.
A corporation's directors may vote for voluntary dissolution either at a meeting of directors or by written consent. A notice of dissolution or application for dissolution form is then filed with the secretary of state. In some states, the secretary of state will not approve the voluntary dissolution of either a corporation that is not in good standing or a corporation with an outstanding tax liability. This is an interesting paradox, because the eventual penalty for delinquency in corporate filings is administrative dissolution.
The secretary of state enjoys the power to order a corporation's administrative dissolution. The secretary of state may exercise this power if a corporation becomes seriously delinquent in meeting its statutory requirements such as periodic filing and tax reporting. What constitutes a delinquency serious enough to warrant an administrative dissolution will differ from state to state. Some states allow a reinstatement of good standing following an administrative dissolution upon a proper filing.
A court of law may order the judicial dissolution of a corporation upon the request of a state attorney general, a shareholder, or a creditor. A shareholder, for example, may bring an action to dissolve a corporation if the corporation is committing a waste of corporate assets, if other shareholders are abusing the shareholder's rights, or if there is a voting deadlock among shareholders or directors.
You should always endeavor to avoid dissolution. Dissolution can lead to a failure of a corporation's liability protection. You should always exercise great care when voluntarily dissolving a corporation. If you are a shareholder of a corporation with outstanding liabilities, do not allow it to become dissolved. If your corporation is dissolved while in debt, those liabilities may be attributed to you personally.