The most common reason for a founder or entrepreneur to set up a corporation is to limit his or her exposure to the liabilities of the business. A corporation provides a shield against the debts of the business. In most cases, unless a shareholder personally guarantees the debt of the corporation, a shareholder will not be personally liable for the corporation’s debt. But the courts make an exception to this general rule of non-liability if recognizing the corporate form would work a fraud or injustice. This exception is commonly referred to as “piercing the corporate veil” (or as imposing “alter ego” liability). When the corporate veil is pierced, a shareholder can be held personally liable for the obligations of the business.
Two of the principal factors that courts consider in determining whether to “pierce the corporate veil” are adequate capitalization and respect for the corporation as a separate entity, apart from the shareholders. And a way to show that the shareholder respects the corporation as a separate entity is to have proper corporate minutes.
For my regular corporate clients, I provide an annual corporate review service. My annual review service includes providing to the client a detailed questionnaire (over 35 questions) for the client to complete to make sure that I have the information that is needed to prepare all the minutes necessary (not simply the absolute minimum). No other lawyer or law firm offers this questionnaire as it is my proprietary work product. Based on the answers in the questionnaire, my office prepares not simply the absolute minimum in minutes but also any other minutes that may be needed. All minutes are reviewed by me to make sure they are legally valid and appropriate for the client. I provide the minutes to the client for review and signature, and my office follows up to get a fully signed copy in the minute book. My office also prepares and files the annual statement of information, which has all the correct information and which is consistent with the most current minutes.
In addition to reducing the prospect of a court piercing the corporate veil, proper corporate minutes can reduce the likelihood that the IRS or the FTB will seek to recharacterize certain transactions in a way disadvantageous to the shareholder. And when there is more than one stockholder, proper corporate minutes can reduce the opportunity for a disgruntled stockholder to attack corporate transactions and hold the directors and officers liable.
Serving San Jose, CA and all of the San Francisco Bay area, Attorney Richard Burt can be reached at (408) 286-7333 or by filling out the online contact form. If you need assistance with business entity formation, arbitration, buy-sell agreements, or outside general counsel, contact Mr. Burt today.