Business Basics: Three Requirements to Keep your Corporation’s Veil Intact

Congratulations!  You have formed your corporation!  Operating your business through a corporation is a very smart step from an asset protection standpoint.  However, you can only reap the benefits if you follow the rules of the corporations code.  Failure to comply with corporate formalities is a factor that courts consider when deciding if they will allow a creditor to “pierce the corporate veil” and allow the creditor to go after the individual shareholders’ assets.  As such, here are three obligations that you should keep in mind:

Annual Meetings

California Corporations Code §§ 301 and 600 require that the Board of Directors and Shareholders meet annually.  They are allowed to “waive” the meeting requirement and host the meeting via written consent, so long as the consent is signed by all of the Board members and all of the Shareholders.  This annual meeting is where the Shareholders elect the Board, and the Board appoints the officers of the corporation.  These minutes need not be complicated, but an annual meeting is a requirement.

Special Meetings

In addition to annual minutes, it is important to document any transactions that occur “outside the ordinary course of business” for the corporation.  For example, if the business is a car rental service, purchasing a new car for the rental fleet likely falls under “ordinary course.”  In contrast, if a law firm decides to buy a building through which it will operate the business, this is outside the “ordinary course,” and there should be a set of minutes showing that the Board of Directors has approved such a significant transaction.  Securing a PPP loan or an EIDL loan through the SBA are further examples of transactions outside the ordinary course of business.  Not only are these required under the Corporations Code, but this is important from a documentation standpoint.  In a small business, this might not be an issue.  But if there are multiple Shareholders, you can eliminate some potential conflict by making sure you put everything in writing.

Statements of Information

Another simple, but mandatory, task is to file your annual Statement of Information with the California Secretary of State.  This lists the officers, directors, agent and address of the corporation for the Secretary of State’s records.  If there are no changes to the information, then you can simply file a “no change” statement, which is even more simple.  Again, this is not a complicated requirement, but it is essential to making sure your corporation stays in good standing with the Secretary of State.

These are three simple tasks that you can do in order to help ensure that your corporation maintains its protective powers.  By taking the time to document things as they happen, it will save you a lot of time and potentially money in the future.