Each month, many small company owners elect to incorporate their business. They might decide at the beginning, or may choose to do it later because their company is growing and they want to shield themselves from the potential liability that growing companies face. Regardless, business owners want to limit the extent to which their personal assets are at risk, should something damaging (usually, a lawsuit) arise. It’s a wise move, and maintaining your minutes dilligently might be a good New year resolution for some.
“What entrepreneurs often don’t focus on,” writes Nina Kaufman Esq at her Ask The Business Lawyer blog, “is the fact that, by incorporating, they have brought a new entity into the world. Much like giving birth to a child. The company now has an independent existence that can, literally, outlive you. The company has needs separate and apart from yours (such as a need to be able to pay its own bills, in addition to paying you). And if you do not treat the corporation properly as an independent “being,” the privilege of shielding yourself and limiting your personal liability can be taken away from you.”
Nina Kaufman continues –
In order for a corporation – any corporation, no matter how large or small — to preserve its special, limited liability status, it needs to observe certain formalities and take certain actions. These “formalities” include (among other things) issuing stock, electing officers and directors, keeping corporate records, adequately capitalizing the corporation, and clearly keeping personal and corporate funds separate. When a corporation doesn’t do these things, its limited liability status is open and vulnerable to attack from creditors who may claim wrongdoing or fraud. In legalese, this is called “piercing the corporate veil.”
Whew! Sounds like a lot, especially for a one-person corporation. At first, it seems a bit awkward and artificial. But it’s not difficult. Think of keeping corporate records, having minutes of your “meetings” as merely the corporate form of “covering your @#%!” Minutes are also helpful when there is more than one owner of a company, so that there is a written summary of the discussion, the actions taken, and how the owners voted. In order to maintain your limited liability shield, it must be clear that the corporation has officially authorized its officers and directors to take significant actions on its behalf. How do you know when a corporation has done so? Because there are written minutes of a meeting (or ratifications of these actions), kept in the corporation’s books!
What’s Major? What’s Ordinary?
So written records of major decisions are vital. But what kinds of issues are considered major? Celine moaned, “Does this mean I have to make a written record every time I go to Staples for pencils? Or take a potential client out to lunch?” Certainly not! Here’s a general rule: if the transaction is the kind of transaction that your business engages in over and over as its core business, then that transaction is “in the ordinary course of business” (“OCB”, is the legalese acronym), and does not need to be documented. So Celine, who is a life coach, does not need to document each time she signs an agreement with a new client. Or Bob, a bookstore owner, does not need to write up minutes for each sale of a book off his shelves.
But there’s a second part to the general rule. If the corporation’s doing what it does is in the ordinary course of business, actions that enable the business to do what it does are not (in the ordinary course). These, by contrast, involve the major decisions that do need to be documented. They are often one-time (or only occasional) transactions. So Celine’s paying $10,000 to create a website for her coaching business is not OCB. Yes, she may need to update the website periodically; she may even choose to completely overhaul it more than once; but once it’s up, it’s done. The website is not Celine’s core business: coaching is. The website is just an ancillary marketing tool. Similarly, Bob’s hiring a contractor to renovate the store and put up bookshelves is not OCB. Once they’re up, they’re up.