For California businesses, there are many benefits associated with forming a corporation over other types of business entities. Depending on the type of corporation, benefits may include eliminating double taxation on income, sales of stock to fund growth, and other tax and investment benefits. However, in order to maintain the benefits of a corporation, the business needs to hold annual meetings and record minutes.
Oftentimes, business owners and board members are too busy handling the day-to-day activities of their business and neglect corporate formalities. However, by neglecting the corporate formalities, individuals may face tax consequences and personal liability for corporate debts.
California requires corporations to hold annual shareholders' meetings and keep adequate records of any such proceedings. Corporate meeting minutes document proceedings that involve corporate shareholders, board of directors, and committees of the board. At a minimum, minutes should include a record of who was present at the meeting, the issues discussed, and a tally of any votes taken. Minutes should also include basic information such as date, time, and place of the meeting, as well as when the meeting was adjourned.
In addition to documenting votes and topics discussed, corporate shareholders may also want to more thoroughly document important decisions. Corporate shareholders have a right to review corporate meetings upon request. Thus, documenting major decisions may help protect the board members and shareholders if a dispute arises in the future.
Failing to maintain corporate formalities may result in serious consequences to corporate shareholders. For example, if shareholders are subjected to a lawsuit, they may be liable for corporate debts if a court determines that there is no real separation between the corporation and the owners. Known as “piercing the corporate veil,” an owner may be stripped of limited liability protections if the court finds that the corporation is merely the owner's alter ego.
In determining whether to pierce the corporate veil, the courts weigh a number of factors, including among others whether the company is closely held by a small group of related individuals, whether the corporation was adequately funded at its inception, and whether the corporation failed to follow corporate formalities.
Many small corporations fail to fully comply with annual corporate requirements. It may be that owners of small corporations may not fully understand the necessity of following corporate formalities. Others may keep putting off the annual meeting because they are too busy dealing with running a business. Regardless of the reasoning, it may be only until after a lawsuit is filed against the corporation or the individual owners that they realize the necessity to maintain corporate formalities.
There may also be tax consequences for corporations that fail to maintain complete corporate minutes. After an IRS audit, federal tax authorities may determine that by not maintaining corporate formalities, the owner may be stripped of their corporate tax benefits. In such an event, individual shareholders may be subjected to taxation on corporate income, without allowing corporate tax deductions.
Butterfield Schechter LLP is San Diego County's largest firm focusing its law practice on employee benefit legal services and business counseling. Our firm can help your corporation keep in compliance with state and federal regulations and filing requirements. Contact our office today with any questions on how we can help you and your business succeed.
