Corporate Records: An Ounce of Prevention

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Many small businesses choose to form corporations through which to operate because of the limited liability afforded to corporate shareholders.  This is a wise choice, but merely incorporating is not enough.  In order to actually enjoy the ongoing protections of limited liability, California law requires corporations to keep certain records.  This is true regardless of how the incorporation is accomplished (with the help of an attorney or through a self-help book or service).  Failing to keep proper records puts the corporation's shareholders at risk of personal liability for corporate debts and liabilities.  Since personal liability is exactly what the shareholders wish to avoid by incorporating, every corporation should calendar and complete the following basic minimum paperwork (in addition to the filing of tax returns with the state and federal government, and you should contact your accountant about that):

1.  Statement of Information.  Every corporation must file a Statement of Information with the California Secretary of State each year during the month of its incorporation (or during any of the five preceding months).  For example, if incorporation occurs in February of 2014, the corporation would then file an annual Statement of Information during the month of February, or sometime during the five preceding months, in subsequent years.  The Statement of Information deadline should be carefully calendared by the
corporation.   This statement is a public record of the address of the corporation, the names and addresses of each of the officers and directors, and the agent for service of process (the person to whom legal papers are delivered when the corporation is sued).  The statement can be filed on-line or mailed in and must be accompanied by the $25 filing fee.

 2.  Annual Shareholder Meeting.  The shareholders need to either hold a meeting or execute a written consent in lieu of the meeting to elect the board for the next year.  The time for holding the meeting or executing the consent is set forth either in the bylaws or in the minutes of the organizational meeting of the board of directors when the corporation is formed.

3.  Annual Board of Directors Meeting.  Each year the directors need to either meet or execute a unanimous written consent in lieu of the meeting to name the officers for the next year.  Again, the time for one of these is set forth either in the bylaws or in the minutes of the organizational meeting of the board of directors when the corporation is formed.  It generally occurs at the same time as the annual shareholder action.

4.  Other Required Meetings.  Finally, the board of directors either needs to meet or execute a unanimous written consent in lieu of the meeting in between annual meetings/consents to approve any action that is not “in the ordinary course of business” or is in some way “extraordinary.”  In other words, the officers can manage the corporation without formal meetings for any ordinary business matter but any matter that is not ordinary is subject to board approval.  Examples of such extraordinary matters would be entering into a lease, purchasing a major corporate asset, settling a lawsuit, and approving a new benefit plan.  You should consult your attorney if there is some corporate action coming up and you are unsure whether it would be considered ordinary or extraordinary.

This is a summary list of the corporate records that must be kept to comply with California law.  Remember, these records are required in order to avoid risking personal shareholder liability for corporate debts and liabilities.  Since keeping proper records is vital to enjoying limited liability protections, consulting with an experienced business attorney is often the best way for a corporation to protect itself.

If you own a small business in the San Francisco Bay Area, or you are thinking of starting a business, contact Jeffrey Miller to find out how he can help you strategize.  (650) 321-0410 or jeff@jeffmillerlaw.com