As the owner of a corporation, you are required to hold shareholders' and directors' meetings, maintain corporate records, and document major corporate decisions. Neglecting these formalities -- in essence, ignoring your corporation's separate existence -- can mean that if your business runs into legal trouble, your corporate status may be disregarded by a court. If this happens, you may be held personally responsible for the corporation's debts.
The good news is that many states have streamlined the procedures for operating a small corporation, permitting owners to make decisions quickly -- without jumping through needless procedural hoops.
To understand the corporate decision-making process, let's look at the different legal roles people traditionally play in a corporation: shareholder, director, officer, and employee. As we consider these roles, keep in mind that you can set up a corporation in which one or two people play all of them.
Shareholders own stock (called shares, or ownership interests) in the corporation. Shareholders have the exclusive right to make the following decisions:
State laws typically require the shareholders to hold an annual meeting, but in many states, shareholders can use a "written consent" or "consent resolution" -- a document signed by all of the shareholders -- in place of a face-to-face meeting.
The board of directors sets policy for the corporation and makes major financial decisions. Among other things, the directors:
While many states require directors to hold regular meetings, it's often simpler and just as effective for the directors to take actions by signing a consent resolution or written consent. Alternatively, most states allow directors' meetings to be held by telephone.
While the organizational structure of corporations separates the rights and duties of shareholders and directors, this separation isn't much of an issue for small corporations because most shareholders are also directors and officers. However, even if you are both a shareholder and director of your corporation, you must still observe the formalities required by law, which means wearing different hats at different times. For instance, sometimes you'll have to sign a document in your capacity as director, at other times you'll sign as a shareholder.
Officers are responsible for the day-to-day operation and management of the corporation. State laws usually require that the corporation have at least a president, a secretary, and a treasurer (sometimes called a chief financial officer). But in most states, one person can hold all of the required offices.
The president is usually the chief operating officer (COO) of the corporation. The secretary is responsible for the corporate records. The treasurer, or chief financial officer (CFO), of course, is responsible for the corporate finances, although it's common to delegate everyday duties to a bookkeeper.
In small corporations, the owners are usually also employees of the corporation. Owners of small corporations receive most of their financial benefits through the salary and other compensation they receive as corporate employees.
While you don't need to document routine business decisions, you should prepare written minutes or consent resolutions for events or decisions that require formal board of director or shareholder participation. These include:
To learn more about corporate decision making and record keeping, and to obtain blank minutes, written consents, and resolutions forms, use The Corporate Minutes Book, by Anthony Mancuso (Nolo).
In addition to keeping records of important business decisions, your corporation must record financial transactions in a double-entry bookkeeping system and keep other financial records in order to file an annual corporate tax return.