Tina Gehres is the president and founder of Gehres Law Group, P.C. Gehres has over 25 years of business and legal experience, and provides small businesses with affordable legal services.
(Photo courtesy of Tina Gehres)
I formed my corporation five years ago, but we haven’t had any shareholder or board meetings, is that a problem?
The answer is a resounding yes. A corporation that does not adhere to the corporate formalities required by the state’s corporations code might run the risk of being treated as a sole proprietor or partnership if the company has more than one owner, and tax the authorities, government agencies and even the courts. If the corporation is disregarded as a separate entity, the owner or owners may be treated as though they had never formed a corporation at all, exposing them to personal liability for the company’s obligations. Failing to adhere to corporate formalities can give rise to other costly legal complications.
- Limiting the corporation’s access to new capital. Without regular meetings of the board and shareholders, the company lacks important documentation for potential investors to review, which indicates the company has been well-managed, has a clear direction and is sustainable. Without such documentation, many investors will likely avoid the investment, considering it too risky.
- Legal action by shareholders. If an investor has become a shareholder in the corporation, the corporations code affords them the right to review the corporate minutes and related documents. If these documents do not exist, it exposes the company to shareholder lawsuits or, at a minimum, provides fertile ground for disputes to arise.
- Securities law violations. While a private placement memorandum — PPM — is an important instrument that provides protection to owners when raising capital, if a court or government agency discovers that the corporation did not exercise sound corporate governance practices, the protections afforded by a PPM may be diluted or even eliminated, exposing owners to personal liability for securities violations, including potential criminal charges.
Since my corporation has not maintained corporate minutes or held shareholder or board meetings for years, what can be done to clean-up the company’s books?
The answer to this question depends on a number of factors. Each business is unique and has a distinct history and structure. The best option to restore the viability of the corporation may simply involve committing to adhere to sound corporate governance practices going forward. If a situation warrants it, your corporate law attorney may recommend forming a new entity to purchase the existing corporation’s assets, dissolving the existing corporation in order to obtain a fresh start.
Retaining a corporate law attorney to perform a few hours of work on an annual basis can safeguard a corporation from these and other serious consequences, many of which can sink a small business and possibly its owners. Considering this, an ounce of prevention is indeed worth a pound of cure.
This article was written by Robin D. Everson of Examiner.com for CBS Small Business Pulse.