It is important that after you form a corporation or LLC that you operate it as a separate legal entity. That means completing corporate and LLC formalities from the start of your entity to each year annually. The good news is that we have included a large set of “template” resolutions in your corporate and LLC record book for you to follow as a guide. Additionally, below we have an outline for your annual minutes and meetings required/recommended.
If you are in a situation where you don’t like to do these things yourself (understandable if you are super busy) we have a great paralegal resource that will complete your corporate/LLC formalities for a small fee. Her name is Summer Owen and her contact information is located below.
What Are Corporate Formalities?
A corporation is a type of business formation that allows the company to operate as its own separate entity, independent from the owners of the business. This means that business owners are shielded from much liability and losses that the corporation may be exposed to. However, in order for the protections of a corporation to exist, the business must observe certain guidelines and operating rules.
“Corporate formalities” are steps and precautions that the business must take to ensure that the corporation remains legally distinct from its owners. Most of these steps include keeping separate records for corporate activity, holding regular meetings for corporate directors, and maintaining a financial independent account for the corporation.
Yes, LLC in our research on court cases we recommend that you formalities also (see below our links). Many states and professionals will say, “LLCs are easier and formalities are NOT required.” We hired an attorney to look into actual court cases to determine what judges look at when it comes to piercing the LLC veil. What our research found is that judges used the same corporate guidelines to determine if someone would be able to pierce the LLC veil which included, “corporate formalities, commingling of funds and thin capitalization rules.” The bottom line is without LLC formalities it may be possible a judge may say you didn’t operate the LLC as a separate legal entity and allow for piercing of the entity veil. Even if your LLC is in Nevada, which is very difficult to pierce, unless outright fraud, we still recommend LLC formalities (it is important from an IRS level also). When we refer to “corporate formalities below, if you have an LLC, just change “Corporate”, to “LLC” and apply the same concept.
What Do Corporate Formalities Usually Include?
The individual requirements for corporate formalities can vary widely by state, and according to the specific type of corporation that the business has filed as. The following is a corporate formalities checklist to follow that can help make sure that corporate formalities are being followed. Some important steps to follow may include:
- Hold Scheduled Meetings: The corporation should hold an annual shareholder’s meeting. The date, time, and details for the meeting should be clearly stated in company bylaws. An annual board of directors meetings is usually held immediately after the shareholder’s meeting
- Hold Special Meetings: Special meetings need to be scheduled whenever important corporate decisions must be made, such as opening a bank account, changing officer salaries, or entering into a new business venture. Notice of the special meeting should be given to the participants
- Keep Accurate Records: The company should keep good financial records and records of corporate activities. Records should also include meetings of minutes, as well as corporate tax activity. Keeping clear, accurate and separate records will also help abuses of corporate assets.
- Exercise Fiduciary Duties to the Corporation: Officers and directors need to exercise loyalty to the corporation by exercising their fiduciary duties. This means not using corporate assets or opportunities for personal gain, and keeping corporate matters private and confidential
- Develop a Planning Routine: A well-developed business plan can help avoid errors and liability in the future. The business plan should cover matters like: both long-term and short term goals; reviews of each year’s performance; tax planning; yearly and quarterly company budgets
- Address Company Contract Procedures: Procedures for negotiating and signing business contracts should be enforced. These may include: authorizing an officer to sign contracts; making all company purchases in the corporation’s name; and maintaining a separate corporate account
- Follow company Bylaws, Articles of Incorporation, and other documents: Failing to comply with company documents can expose directors and shareholders to liabilities that they should not have to incur.
Are There Any Actions That Corporate Directors Should Avoid?
If corporate formalities are not followed, it can result in what is known as “piercing the corporate veil”. “Piercing the corporate veil” means that the corporation is no longer acting separately from the business owners. This can result in the business owners becoming liable for losses or liabilities that the organization incurs.
To avoid liability for directors, officers, and shareholders, business actors should take the following precautions:
- Do NOT engage in insider deals, insider trading, or other abuses of confidential corporate information
- Do NOT use corporate funds and assets for personal reasons
- Do NOT mix corporate funds with personal funds (i.e., “commingling”)
Annual Meeting Minutes Formalities
Corporate and LLC Annual Formalities and Video Overview:
LLC Annual Formalities and Video Overview (linked to the PDF):
Add these annual minutes to your record book after the “Minutes & Resolutions” divider page.
Do not send them to NCP!!! These Meeting Minutes are for your company records which distinguish you as a working Corporation.
IMPORTANT if you are Making Changes to Managers or Officers in your LLC or Corporation.
There are TWO steps if you plan to change your officers or managers on your annual list.
- Update the annual list with your new officers and managers and get to NCP to file with the Nevada Secretary of State, AND
- Update your LLC or Corporate record book with the appropriate minutes and meetings to have the new person to be appointment and accept their position (plus the previous person to resign). This is very important from a legal point of view.
We recommend you speak with Summer Owens, a paralegal with the law firm, Durham, Jones and Pinegar, here in Las Vegas. Summer will quote you a fee to complete the required formalities. You may contact Summer at 702-870-6060.
Corporate and LLC Formality Training by Attorney Sherwood Cook (MP3 to download):
Corporate and LLC Resolutions to Download (to make changes):