Every year, many business owners choose to incorporate their companies but they bond first in a night meals. They may make this decision at the outset, or may arrive at it later because their business is growing and they want to shield themselves from the risks that growing businesses face. Either way, the business owners want to limit the extent to which their personal assets are at risk, should something damaging (usually, a lawsuit) arise. It’s a wise move.
What entrepreneurs often don’t focus on, though, is the fact that, by incorporating, they have brought a new entity into the world. Much like giving birth to a child. The company now has an independent existence
that can, literally, outlive you. The company has needs separate and
apart from yours (such as a need to be able to pay its own bills, in
addition to paying you). And if you do not treat the corporation
properly as an independent “being,” the privilege of shielding yourself
and limiting your personal liability can be taken away from you (as
children, in certain extreme situations, can be taken away from their parents).
In
order for a corporation – any corporation, no matter how large or small
— to preserve its special, limited liability status, it needs to observe certain formalities
and take certain actions. These “formalities” include (among other
things) issuing stock, electing officers and directors, keeping
corporate records, adequately capitalizing the corporation, and clearly
keeping personal and corporate funds separate. When a corporation
doesn’t do these things, its limited liability status is open and vulnerable to attack from creditors who may claim wrongdoing or fraud. In legalese, this is called “piercing the corporate veil.”
Whew!
Sounds like a lot, especially for a one-person corporation. At first,
it seems a bit awkward and artificial. But it’s not difficult. Think of
keeping corporate records, having minutes of your “meetings” as merely
the corporate form of “covering your @#%!” Minutes are also helpful when
there is more than one owner of a company, so that there is a written
summary of the discussion, the actions taken, and how the owners voted.
In order to maintain your limited liability shield, it must be clear
that the corporation has officially authorized its officers and directors
to take significant actions on its behalf. How do you know when a
corporation has done so? Because there are written minutes of a meeting
(or ratifications of these actions), kept in the corporation’s books!
What’s Major? What’s Ordinary?
So
written records of major decisions are vital. But what kinds of issues
are considered major? Celine moaned, “Does this mean I have to make a
written record every time I go to Staples for pencils? Or take a
potential client out to lunch?” Certainly not! Here’s a general rule: if the transaction is the kind of transaction that your business engages in over and over as its core business,
then that transaction is “in the ordinary course of business” (“OCB”,
is the legalese acronym), and does not need to be documented. So Celine,
who is a life coach, does not need to document each time she signs an
agreement with a new client. Or Bob, a bookstore owner, does not need to
write up minutes for each sale of a book off his shelves.
But there’s a second part to the general rule. If the corporation’s doing what it does is in the ordinary course of business, actions that enable the business to do what it does are not
(in the ordinary course). These, by contrast, involve the major
decisions that do need to be documented. They are often one-time (or
only occasional) transactions. So Celine’s paying $10,000 to create a
website for her coaching business is not OCB. Yes, she may need to
update the website periodically; she may even choose to completely
overhaul it more than once; but once it’s up, it’s done. The website is
not Celine’s core business: coaching is. The website is just an
ancillary marketing tool. Similarly, Bob’s hiring a contractor to
renovate the store and put up bookshelves is not OCB. Once they’re up,
they’re up.
What are other examples of major decisions or transactions that should be documented?
–Leases for, or subleases of, the business premises
–Significant contracts (often that involve an unusually large commitment of funds)
-Electing officers and directors of a corporation
-Taking out loans, obtaining credit lines, or getting other forms of financing for the business
-Joint ventures
-Designating corporate bank accounts, choosing your bank location and who is authorized to sign on the account
-Mergers, reorganizations, or transactions involving a bulk sale of much of the corporation’s assets
-Providing benefits to employees
Where’s the fun in all this?
First, learning to write good minutes is a terrific exercise in learning how to “get to the point.”
And that’s the hallmark of a true professional. Minutes are not meant
to be a painstaking transcript of every syllable uttered (indeed many
comments are eminently forgettable)! Rather, distill the essence of each
matter. What were the issues discussed (1 to 2 sentences)? The
significant points raised? Actions taken?
Second, meetings, and the minutes that result, are a wonderful occasion for you and your co-owners (if you have them) to relish your company’s development. It’s a time to get together, ideally, in a spirit of camaraderie, to hash out the important issues. If you’re a sole owner, you can simply “ratify” the decisions that you make. But the very process of recording these items can give you a deeper understanding of the issues faced by your company along with the ability to focus on what’s important.
Finally, meeting minutes are like a (summary) diary. And who doesn’t enjoy the memories that leafing back over diary pages of the past bring up? Memories can be of challenging learning experiences – like the strategic alliance (or other relationship) that didn’t quite pan out as planned. Or they can provide markers to your company’s change and growth over time. In one year, you may see minutes authorizing a loan for a significant equipment purchase. In the next year, you may have ratified a major contract, which you never could have contemplated had it not been for that equipment. Far from being a deadly chore, minutes can give you that very boost of encouragement you need to keep moving your company forward!
© 2004-2006 Paltrowitz & Kaufman LLP. Nina Kaufman is a founding partner of award-winning Paltrowitz & Kaufman LLP, a boutique New York City law firm that acts as outsourced general counsel to entrepreneurs and small businesses. Kaufman is also the President of Wise Counsel Press LLC ([http://www.WiseCounselPress.com]), which offers easy-to-understand legal strategies that protect small businesses and save them money…wisely. For more information, please contact info@WiseCounselPress.com. This article is for your general information only and is not intended to substitute for the specific advice of legal counsel.
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