Corporation Operating Formalities

The essential rules of operation for a corporation are known as the “Corporate Formalities,” or “Operating Formalities.” These rules were designed to ensure that the separate legal entity status afforded a corporation is maintained, and the observance of the rules ensures that the all of the benefits commensurate with the formation of a corporation are not compromised. These formalities should be observed by all officers, members, and directors of a corporation, with specific duties and implementation assigned as appropriate. Failure to observe these formalities can lead to the “piercing of the corporate veil” by outside regulatory, tax, or other agencies.

Primary Operating Formalities Summarized
-The Corporation must maintain an accurate account of all meetings by the board or special meetings held by the shareholders. These accounts, or notes, are known as “minutes,” and are maintained in the corporate “minutes book.” The care and accuracy of the minutes is a direct responsibility of the corporate Secretary. It is important that thorough and accurate minutes are maintained by the Secretary, as these minutes can prove invaluable against attempts to disprove the separate legal entity status of the corporation by regulatory or other agencies.

-There shall be no co-mingling of corporate funds. This means that private assets belonging to a director, officer, or shareholder of the corporation should not ever be “mixed” with the company or corporate funds. Co-mingling can occur via such simple acts as paying company invoices directly from a personal checking account, or conversely, paying a personal auto loan from the company check book. These types of actions serve to undermine the separate legal entity status of a corporation, and can lead to direct personal liability or the loss of personal assets in the event of litigation, tax, or collections proceedings.

-The Corporate Board of Directors must meet at least once a year. These meetings are required by all 50 states, and are the formal meeting during which important strategic corporate decisions are undertaken, such as large acquisitions, mergers, strategic transactional or contractual agreements with other entities, etc. In addition, it is usually during these meetings that decisions regarding corporate leadership are made, and where officer positions are affirmed, changed, and even a chairman or CEO is appointed. Attendance is a must by all directors, unless written consent of assignment of proxy vote is granted to another member of the board by the absentee member.

-All contractual agreements entered into by the corporation, at the corporate level, must be memorialized in writing, with express consent of the Board of Directors. This includes all financially-binding agreements (loans, lines of credit, etc.), acquisitions (real estate, other corporate entities, capital equipment, etc.), and employment (with officers, etc.). Failure to properly engage other entities or potential employees may result in severe tax or fiscal liabilities, and in extreme cases, may jeopardize the separate legal entity status of a corporation if there are implications that an officer or member of the Board was using the corporation or its assets as his alter-ego.

The implementation and structure of these formalities will of course vary with the type of corporation formed, but the basic, essential structure is the same. These formalities are an essential component of the corporate operation and should be adhered to as a matter of course. Failure to adhere to the corporate formalities will often lead to a weakening of the asset protection, and limited liability protection, afforded by the formation of a corporation, with the commensurate consequences.

The Corporate Structure
Corporate Officers

Corporate officers typically consist of the President, Vice president, treasurer and secretary. A corporation can choose to have more officer positions, but these are the standard, best practices positions. Many states allow one person to hold all of the offices, but this may not be the best practices approach. The authority and responsibilities of each officer are outlined in the corporate bylaws.

The President
The President of the corporation is usually elected by the Board of Directors and is responsible for carrying out the orders issued by the Board of Directors. The President is the figure head of the corporation.

The Treasurer
The Treasurer is responsible for the management of all corporate funds, bank accounts, lines of credit, and for recording all corporate financial transactions. While many of these duties are self-directed, the Treasurer takes his or her direction from the Board of Directors.

The Secretary
The Secretary plays a vital role in that he or she is responsible for the upkeep and safeguarding of corporate records. This includes, but is not limited to, the formation documents, the corporate minutes, and any business transactions or written agreements entered into or on behalf of the corporation.

The Board of Directors

The Board of Directors is the governing body of the corporation that directs the fundamental policies and major undertakings of the corporation. The directors usually elect the president and leave general operations and day-to-day business to the president and other officers under their employ, but usually require consulting before any substantive decisions or agreements are entered into.

The Corporate Shareholders

Shareholders (also called stockholders) are the owners of a corporation. As such, the board of directors and the officers of the company owe a fiduciary duty to the shareholders to do what is in their best interest as a group. Specific shareholder rights are outlined in company bylaws and in state law, and these laws vary from state to state. Though specific duties and reporting practices vary from state to state, the shareholders generally vote on the president, the election of the board of directors and any major changes in the composition or organization of the corporation.

Corporate Resolutions

Corporate resolutions are written resolutions that serve to outline strategy, compensation, and benefits to the shareholders and officers of a corporation. While they are not required for every corporate decision, it is a best practice procedure to record the major decisions of the corporation in the form of written resolutions. This strengthens the corporations legal shield by providing solid evidence that any actions were taken on behalf of the corporation and not on behalf of the owners or officers.

Corporate Bylaws

Corporate bylaws, or the “rules” for the corporation and it’s shareholders, are drafted by a corporation's founders or directors under the authority of its Charter or Articles of Incorporation. Bylaws widely vary from organization to organization, but generally cover topics such as how directors are elected, how meetings of directors and shareholders are conducted, and what officers the organization will have and a description of their duties. They can generally be amended by an organization's Board of Directors

We cannot stress highly enough that failure to observe and implement any of these formalities will serve to diminish and mitigate the protections offered by the formation of the Corporation and will allow outside entities (the IRS, creditors, claimants/plaintiffs, potential adverse litigants, etc.) to “pierce the corporate veil” and peer into the inner workings and assets of the Corporation, it’s Officers, Directors and Shareholders.