Why Keeping Up with Corporate Formality is a Must
I can’t tell you how many times clients who are starting businesses have said to me: ‘just form the company; I don’t need all that other stuff. They are trying to save a few bucks, know they need to incorporate, but can’t see any value in doing the basic documents that form the operational backbone of any business.
If you do not keep minutes, you cannot appoint officers or directors, or pass resolutions. If you have no resolutions, you cannot open bank accounts, or get loans, or change gears. And if you have never formally adopted bylaws, or in the case of an LLC, an Operating Agreement, then you can’t notice meetings or adopt minutes or pass resolutions. If you have gotten away with no minutes, operating documents or resolutions, it will eventually bite you in the you- know- what.
Here is what can happen to you:
- You can have your s-corp status rescinded or denied
- A creditor can pierce your company and come after you personally for corporate debt
- You can have mutinies by officers and directors with no recourse
- You can be accused of bank fraud
- You can lose tax-advantaged status
- You can spend a fortune, when the time comes that you have to be up to date with corporate formality, having a lawyer reconstitute your books.
It’s not that expensive to observe basic formality. Have Organizational minutes that pass the initial slate of officers, then adopt bylaws and authorize the bank.
Using the bylaws, give notice of an annual meeting each year, and make sure someone takes minutes. Reduce the minutes to writing and adopt them.
File your annual report. Call a special meeting if there is activity outside of the day-to-day operations. Your lawyer can show how you how to do all this once, and you can take it from there with minimal legal expense. For more on what can happen if you run a sloppy corporation, go to The Evil Lawyer and the Pierced Veil.