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THE BUSINESS ADVISOR

CHECKLISTS FOR YOUR CORPORATION

by Mary Hanson

In order to maintain a strong "corporate veil," a corporation must observe corporate formalities. It is important to keep the corporate minutes and other documents that prove those formalities were observed. Your records should evidence actions taken or approved by the Board of Directors and by the shareholders.

The minimum requirement for meetings under California corporation law is a yearly meeting of shareholders. However, since governing power and decision-making authority in a corporation are based in the Board of Directors, make sure you show that the Board of Directors has taken action or approved actions taken by the corporation.

In reviewing your corporate records, check to see that you have minutes of corporate meetings for each year, and that the documents from the original incorporation show that the basic requirements of corporation law were met.

Check the minutes of the first corporate meeting to see that directors were named, stock was issued to shareholders, and the corporation was capitalized. If you cannot show the issuance of stock for consideration (money or assets), the corporate veil may be challenged based on inadequate capitalization.

The following is a checklist of things to look for in your corporate book:

1. Check the number of directors stated in the Bylaws. Compare this to the Statement by Domestic Stock Corporation and Minutes. Are they consistent and correct? Are there any vacancies on the Board (fewer named directors than the number stated in the Bylaws)? Are there more directors than the Bylaws authorize? To change the number of directors, you must amend your Bylaws.

2. If there are any amendments of the Bylaws, are there copies of such amendments placed with the original Bylaws in the corporate book?

3. Check the authorized number of shares in the Articles of Incorporation and on the stock certificates. If the number is exceeded, some stock issued is invalid. If this is the case, you must amend your Articles of Incorporation, and reissue stock.

4. If there are any amendments of the Articles of Incorporation, are there copies of such amendments placed with the original Articles of Incorporation in the corporate book?

5. Check the issuance of stock. Do the Minutes authorizing issuance and the stock ledger make clear how many shares are outstanding and who holds those shares? Is the consideration (money or assets) paid for the stock stated? Are transfers of stock recorded and old certificates canceled?

6. Check the securities law notices (e.g., the Notice of Transaction form filed with the Department of Corporations indicating the total consideration for the issuance). Is there one form for every time stock was issued? Is there evidence that they were filed with the Department of Corporations?

7. Are there copies of the Statement by Domestic Stock Corporation filed with the Secretary of State for each year? Check the most recent Statement filed to make sure it is correct and that a current Statement has been filed as required. Check to make sure the address of the corporation is current. The form is now a biennial form. If the form on file contains an outdated address, the Secretary of State will send forms to the old address when it is time for you to file again. The penalty for failure to file is $250.00, even if your reason for not filing is that you did not receive the form.

Check the most current Statement to see that the reported directors and officers on the form are the same as those in the corporate minutes. If the minutes are incorrect, prepare minutes that correct the error. If the Statement filed is not correct, obtain a blank one from the Secretary of State and file the correct information.

8. Are there promissory notes to evidence any loans from shareholders?

9. Are there minutes of meetings for each year? If there are meetings that involved disagreements or lack of cooperation, are there copies of notices and proof that proper notices were sent, and that a quorum was present?

The following are questions that the corporate minutes of the meetings of the Board of Directors and shareholders should answer:

Board Of Directors

Have corporate officers been named by the Board of Directors?
Have actions been taken with valid meetings and majority vote? If you have several directors, make sure your meetings comply with legal requirements for meeting notices, quorum, and voting. Check your Bylaws to determine what is required. If you do not have Bylaws, check the applicable corporation law.
Are there any unrecorded understandings between co-owners? Corporate actions regarding compensation, insurance, bank accounts, duties, responsibilities, authority, use of company assets, and other arrangements are properly covered in minutes of meetings of the Board of Directors. If co-owners have an agreement involving any of these matters, they should be recorded as corporate actions or policies approved by the Board of Directors. The minutes of meetings can serve to evidence the understanding.

If there is dissension among the directors, actions taken by the Board can be challenged as invalid if notice and meeting requirements are not met. In such cases, make sure records are kept to prove that requirements were met.

When all directors are in agreement, a formal meeting is not required. California corporation law and most Bylaws authorize the use of a "Written Consent Without Meeting" to approve corporate actions if such a Consent is signed by all directors.

Shareholders

Has there been an annual meeting? Check the Bylaws to determine when the annual meeting is supposed to be held.
Have the shareholders elected the Board of Directors?
Have your actions been taken with valid meetings and majority vote? If you have a number of shareholders, and especially if you have shareholders who are at odds with the others, make sure your meetings are held in compliance with corporate requirements. Check your Bylaws to determine your requirements for meeting notices, a meeting quorum, and any other voting requirements. If you don’t have Bylaws, check the corporation laws that apply to your corporation.

California corporation law requires that shareholders be given notice of the date, time and location of a meeting at least ten days prior to the meeting. In some cases, the notice of the meeting must include identification of the action proposed in order for that action to be valid when taken.

If there is dissension among the shareholders, actions taken can be challenged as invalid if notice and meeting requirements are not met. In such cases, make sure records are kept to prove that requirements were met.

Under California law, shareholders can also use a "Written Consent Without Meeting" for all shareholder actions, except the required annual meeting.

Shareholders typically take far fewer actions than the Board of Directors. The shareholders have few matters, other than a number of financial matters, that they are either entitled or obligated to vote on. The decision-making power and authority of a corporation resides in the Board of Directors.

Are there other financial transactions that require shareholder approval? Applicable corporation code should be checked to determine whether such approval is required.

If your Board of Directors and your shareholders are the same individuals, having a joint meeting allows all issues to be voted on without worrying about which issues are for the Board of Directors and which are matters requiring a vote of the shareholders.

The following is a quick checklist to use to see that your corporate book contains the appropriate records:

CORPORATE RECORD CHECKLIST

___ Articles of Incorporation

___ Amendment(s) of Articles of Incorporation, if any

___ Bylaws

___ Amendment(s) of Bylaws, if any

___ Stock certificates

___ Notice of Transaction or other securities form for every issuance of stock

___ Stock ledger completed to last issuance or transfer of stock

___ Statement by Domestic Stock Corporation for every year through 2000

___ Bank resolution card authorizing signatures

___ List of assets transferred into corporation

___ Fictitious name statements (DBAs), if any

___ Minutes of shareholders' meetings (at least one per year)

___ Minutes of directors' meetings (at least one per year)

___ Proof of notice of meetings, especially for meetings involving potential disputes

___ Promissory notes for loans from shareholders

___ Shareholder agreement

___ Form evidencing election of S corporation status

___ Corporate seal

The corporate book should be one place to look for all key records regarding the organization and operation of the corporation. If there is any challenge to the corporation, the proof of proper operation should be there. In addition to the Bylaws and minutes of meetings, other documents such as fictitious name statements (DBAs) filed by the corporation, and a copy of the Statement by Domestic Stock corporation filed by the corporation can quickly support a challenge. Having these in the corporate book helps the business owner and advisor to quickly check to make sure, for example, that a DBA isn’t filed in the name of the individual or a partnership, and that filings with the Secretary of State are up to date.

Having copies of bank resolutions authorizing signatures on bank accounts and the shareholder agreement makes the corporate book a quick source of other corporate information.

Mary Hanson, MBA, Attorney at Law (310) 543-1355 Torrance (Los Angeles County), California USA