Basics About Managing Your Corporation
While limited liability companies have become quite popular, businesses that are likely to grow into large businesses should generally operate as corporations.
Benefits of Forming a Company
The limited liability and tax benefits of doing business in the corporate form result from the corporation being treated as a separate entity. To obtain these benefits, it is important that the corporation be operated as an entity separate from its shareholders, directors, and officers. In order to do this, you must understand the role of each of the persons involved in the operation of the corporation and must comply with certain formalities in operating the corporation.
Separate Legal Entity
It is critical that you recognise the corporation as a separate entity and treat it as such. Under no circumstances should corporate and personal funds, assets, or accounts be mixed. Corporate funds should not be used to pay personal expenses, to make personal investments, or for any other purposes not related to the corporation’s business. Corporate assets should be distributed to shareholders only in the form of dividends and obligations for such things as salaries, rents, and debt payments where the board of directors has authorised the expense in advance.
The corporation should also be held out to third parties as a separate entity. All business of the corporation should be conducted in the name of the corporation, and the name of the corporation should be used on all agreements, contracts, leases, orders, and other arrangements entered into by the corporation. It should also be used on all products, signs, advertisements, correspondence, business cards, telephone directory listings, and similar items. The corporation should carry its own insurance and will be required to file its own income and employment tax returns.
The corporation can only act through individuals. However, when acting for the corporation, remember that you are acting as a representative of the corporation, and not in your individual capacity. When signing documents, you should make it clear that you are acting in a representative capacity for the corporation. For example, all documents signed on behalf of the corporation by its president should be signed, “[name of corporation] by [your name], [title].” If you fail to make your representative capacity clear, you run the risk of incurring personal liability for the obligations of the corporation.
The shareholders, directors, and officers of the corporation all have their own roles and functions. It is important that these roles be kept separate and respected. This is particularly crucial in the case of a closely-held corporation where the same individuals likely function in several different capacities.
The shareholders own the corporation. However, they are not partners in a partnership, and they neither own the corporation’s business (which is owned by the corporation) nor manage the business (which is the function of the board of directors and officers). The shareholders own stock in the corporation and have a voice in the management of the corporation because they elect the directors of the corporation and participate in certain major decisions, such as sale of substantially all of the assets of the corporation and amendment of its certificate of incorporation. If the corporation’s existence is to be respected, it is important that the shareholders’ activities are limited to their proper role.
The shareholders must act as a group. Actions are taken at meetings, or by written consents signed by all shareholders, through the adoption of formal resolutions. A formal written record of all actions taken by the shareholders should be maintained in the corporation’s record book.
Shareholder meetings should be held at least once a year for the purpose of electing directors. Special meetings may be required if additional matters requiring shareholder approval arise.
The board of directors of the corporation is responsible for its management. The board of directors establishes policy, which is carried out on a day-to-day basis by the officers of the corporation. The board of directors elects, and can remove, the officers. The board of directors also makes all major decisions relating to the management of the corporation, including the compensation paid to employees, issuance of stock, approval of important contracts, borrowing of money, purchase of equipment and property, and the payment of dividends.
The board of directors must act as a group. Actions are taken at meetings, or by written consents signed by all directors, through the adoption of formal resolutions. A formal written record of all actions of the board of directors should be maintained in the corporation’s record book.
The board of directors should meet at least once a year for the purpose of electing officers and dealing with such things as the compensation of shareholder-employees. However, special meetings will be required from time to time throughout the year as issues requiring the attention of the board of directors arise. In many cases, these issues can be addressed by means of consent to action signed by the directors.
The officers are agents of the corporation and are responsible for conducting its day-to-day business activities. The business is to be conducted in accordance with policies established by the board of directors, and authorisation must be obtained from the board of directors for major corporate transactions. The scope of authority and the functions and responsibilities of the various officers are set forth in the bylaws of the corporation.
Because a corporation is a separate entity in which individuals may play a variety of roles, certain formalities are prescribed for corporate actions. Complying with these formalities is important to have the corporation recognised as a separate entity and to avoid personal liability for the obligations and liabilities of the corporation. The bylaws of the corporation provide a guide to compliance with proper corporate formalities. In addition, proper and complete records must be maintained by the corporation. It is important that you carefully review the bylaws so that you understand the formalities that must be followed.
Your corporation must keep correct and complete books and records of account and shall keep minutes of the proceedings of shareholders, board and executive committee, if any, and shall keep at the office of the corporation in New York, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record. Any of the foregoing books, minutes or records may be in written form or in any other form capable of being converted into written form within a reasonable time.