CLIENT LETTER REGARDING INCORPORATION

 

[DATE]

 

[NAME]

[ADDRESS]

Dear [NAME]:

You have just formed a corporation to conduct your new business. Two of the most important aspects of doing business using the corporate form is the limited personal liability enjoyed by corporate shareholders and the tax benefits that may flow from the corporate form of business. Such limited liability and tax benefits will be available, however, only if the shareholders and directors of the corporation follow certain formalities. The purpose of this letter is intended to familiarize you with some of the basic requirements of corporation law and to make you aware of certain areas in which it is important that you seek further legal guidance before acting.

The benefit of having a corporation is a result of the fact that under the law, a corporation is recognized as a legal "person," separate and distinct from its individual shareholders, directors and officers. In order to enjoy this benefit, it is very important that the corporation be operated in a manner which maintains this separate identity. This requires that the corporation abide by certain formal legal requirements.

It is very important that the affairs of the corporation and the personal affairs of its officers, directors, and shareholders be kept separate and distinct. Never mix the corporate and personal funds. The assets and liabilities of the corporation should be kept separate from those of shareholders, directors and officers. The corporation should never use its funds or assets for the personal benefit of its shareholders. Likewise, the shareholders, directors, and officers should never use their personal assets on behalf of the corporation, at least without first undertaking certain corporate formalities.

The business of the corporation should be done in the corporation name. It should never be done in the name of an individual shareholder, director, or officer. The corporation's name should appear on all corporate documents, including all telephone listings, advertisements, business cards, letterheads, signs, forms.

The articles of incorporation set out the true name of the corporation. It is important to use this true and proper name. If the corporate name includes the term "Corporation," do not just use "Corp." Be familiar with the name of the corporation and use it.

If you wish to use a different name for conducting some or all corporate business, it is possible for the corporation to obtain and use an assumed business name. In order to do so, certain steps need to be taken, forms prepared, and the documents filed with the government.

Likewise, if the corporation wishes to use any names associated with its products and/or services, the corporation may apply for and obtain trademarks and/or service marks.

If you wish to have the corporation use any alternative business names, trade marks or service marks, please contact me so that we can determine if such names are available and so we can prepare the necessary paperwork.

One of the principal reasons for using the corporate form is to minimize the chance that you and the other shareholders will be held personally liable for corporate debts. One of the most important steps in achieving this goal is to make sure that when you sign any documents on behalf of the corporation, you do so in a way that makes clear that you are acting as an agent or officer of the corporation, not in your individual capacity. In order to do so, it is important that you sign all corporate documents in the following manner:

[CORPORATION'S NAME]

by:___________________________

[YOUR NAME AND TITLE]

When you sign a document in your individual capacity, that is, in a capacity in which you intend to be personally liable, you should add after your name the fact that you are signing either "personally" or "individually."

Officers, Directors, and Shareholders

Nearly all corporations have officers, directors, and shareholders. Each of these positions are separate and distinct. Particularly in small, closely-held corporations, it is very common that a person hold more than one of these positions simultaneously. Even though the same person may hold more than one position, each position is legally distinct and it is very important that you understand the function of each position and that you act in the proper manner for each such position.

Shareholders own the corporation. They do so by owning shares of the corporation's stock. Although the shareholders own the corporation, they do not own the corporation's business or the individual assets of the corporation. For example, even if you owned one share of stock in General Motors Corporation, you would have no ownership interest in any individual building owned by General Motors and you have no ability to sell or borrow against that building. This is true with your new corporation as well.

As a shareholder, your duties are very limited. In general, shareholders meet very seldom, often only once each year at the annual shareholder meeting. In general, the shareholders elect and may remove directors. In general, the shareholders have no say in the general day-to-day management of the corporation.

In addition to electing directors, the shareholders generally may vote to approve or disapprove the recommendation of the directors for certain extraordinary events, such as the sale of all corporate assets, most corporate mergers, and the corporation's dissolution. As a general rule, the directors first must refer these matters to the shareholders and, only then, may the shareholders have the opportunity to vote "yes" or "no" on these issues.

The directors are responsible for the management of the corporation. The directors must act as a group, not individually. In general, the directors act by means of a meeting at which all directors have an opportunity to voice their opinion and to persuade the other directors. Directors generally must approve any corporate action by majority vote.

The directors may also act by uniform consent, that is, all directors may sign a consent indicating that they approve of the proposed action. Such approval must be unanimous.

The directors establish policy, that is, they make all major business decisions for the corporation. Whether a decision is a "major" one is subjective. When IBM decides to spend $1 million to buy equipment, this is not a "major" decision for IBM. But if a small corporation decides to spend $50,000, this may very well be a "major" decision that requires the consideration and vote for approval by the board of directors.

In general, your corporation's board of directors should make decisions concerning the appointment and removal of officers, the hiring and firing of executive employees, the compensation of executive employees, the issuance of stock to any person, the payment of dividends or distributions, the approval of important contracts, the loaning and borrowing of any significant amount of money, the purchase of major pieces of equipment and significant parcels of property, and the initiation of any new substantial venture.

The directors should meet and discuss each of these issues before they make a decision whether to approve or disapprove. Once the board of directors makes their decision, the decision should be expressed in the form of a resolution adopted by the board and recorded in the corporate minutes. These resolutions should be placed into the corporate book and retained for the history of the corporation.

The authority of the board of directors is limited by law, and may be limited by the articles of incorporation and by the bylaws. If the directors act contrary to law, or contrary to the articles of incorporation or bylaws, those acts may be considered void or voidable.

Although the board of directors establishes policy and directs management, the corporation's officers, agents and employees carry out the corporation's day-to-day business. In general, the board of directors should authorize officers, agents and employees to act on specific manners. Certainly, the board of directors may delegate certain ministerial duties to the officers, agents and employees. For major issues, such as the purchase of a building, the board should make the purchase decision and then should authorize the corporation's officers, agents or employees to actually undertake the steps necessary to accomplish the purchase, such as signing the necessary documents.

Particularly in small, closely-held corporations where the same people serve as shareholders, directors and officers, it is very important for these people to remember which role the person is playing in any particular act. For instance, since corporate officers and employees implement the management decisions of the board of directors, contracts should be signed by a person who is acting in the capacity of an officer or employee. No one should sign a contract in the capacity as a director or as a shareholder. Directors make decision; directors do not usually take whatever actions are necessary to implement that decision. Directors think and decide; officers, agents and employees act.

When the shareholders meet, a record of the meeting should be kept. These records, or minutes, should be kept in the corporate book. They must be available for inspection by the shareholders pursuant to law.

When the board of directors meet, the board should likewise keep a record of the meeting. These records should also be kept in the corporate book and should be available for inspection by shareholders as required by law.

Certain meetings of the shareholders are required by law and by the bylaws. Your bylaws require that a meeting of the shareholders occur at least once per year. It provides that the directors may determine the meetings date, time and place. In the event the directors fail to do so, Section [NUMBER] of the bylaws provides that the annual meeting will be held at [STATE THE TIME, PLACE AND DATE OF THE MEETING AS PROVIDED IN THE BYLAWS].

At this annual meeting of the shareholders, the shareholders usually should vote to elect the directors for the upcoming year. In addition, the financial condition and goals and objectives of the corporation are usually discussed. Usually, the shareholders take no other action at the annual shareholder meeting.

If the annual meeting of the shareholders occurs at a time, place or date other than the time, date and place described in the bylaws, the bylaws require that a meeting notice be sent to the shareholders of record in advance. The requirements of that notice are set forth in Section [NUMBER] of the bylaws.

The written record of a shareholder's meeting, the minutes, should be kept and inserted into the corporate book. The minutes should show that proper notice was given for the meeting and that a quorum of shareholders was present. In the event that proper notice was not given, the shareholders may waive notice, but only if all of them do so. The waiver should be in writing and the writing should be placed in the corporate book.

Under some circumstances, the shareholders may wish to act by means of a consent resolution. A consent resolution is a resolution signed by all shareholders, that is, the resolution must be adopted unanimously. In order to do so, the resolution must be circulated, each shareholder must sign the resolution, and each shareholder must date his or her signature. The resolution becomes effective only on the date that the last shareholder signs. If the shareholder forgets to date his or her signature, it will be difficult to determine the date that the resolution was adopted. Therefore, it is very important that each shareholder dates his or her signature.

Directors manage the corporation on behalf of the shareholders. As such, the directors are held to certain high standards of conduct and are responsible to the corporation and the shareholders by law. A director must act in good faith and with care in acting on behalf of the corporation. A director acts on behalf of the corporation and all shareholders, not necessarily on behalf of the director's own personal interest.

A director owes a fiduciary duty of loyalty and fair dealing to the corporation and to the shareholders. A director must act in the best interest of the corporation, not necessarily in the director's own personal best interests. Any conflict which may arise between the director's personal interests and the interests of the corporation must be resolved in favor of the corporation. In general, a director should abstain from voting on any issue in which the director has a personal interest. In any case, a director who has a personal interest in the vote should disclose that personal interest to the other directors and such disclosure should be noted in the corporate records.

All dealings between a director and the corporation should be approved by a majority vote of the directors not personally involved in the decision. Before the vote, the interested director should make full disclosure about the facts and circumstances of the transaction. Examples would include an agreement for the corporation to purchase property from a director, to rent equipment from a director, or to make loans to a director.

Although one of the principal purposes of forming a corporation is to avoid personal liability, there are certain acts which can impose personal liability on directors, officers, and shareholders. Probably one of the most important of these relates to the filing of all tax returns and the payment of all required taxes. This is particularly true with respect to employee withholding taxes. Taxes withheld from employee wages are held in trust on behalf of the employee and the government. An officer and/or director can be personally liable if these funds are used for other corporate purposes.

In addition, certain acts are specifically prohibited by law or can impose personal liability on officers and directors. Although the list of such acts is long, and unfortunately growing longer every year, some of the more important prohibited acts include the following:

If a director is present at a meeting when a vote is taken, the director will be deemed to have voted in favor of the act unless the director objects to the act either at the beginning of the meeting, promptly upon the director's arrival, or at the time that the issue is first raised. If the director objects, a dissent or abstention from the action should be entered into the minutes of the meeting and placed in the corporate record. In addition, a written dissent or abstention should be delivered to the corporation soon after the meeting so that written objection may appear in the corporate record.

The corporation will undertake many business acts and make many business decisions which will have significant legal consequences. Some acts particularly require consultation with an attorney. Although it is not possible for me to list all such major corporate business matters, I would strongly urge you to consult with me or with other corporate counsel if the corporation contemplates undertaking any of the following acts:

This letter is meant to be a brief summary of some of the aspects of doing business as a corporation. Needless to say, no letter can cover all aspects. Please contact me if you have any questions concerning the operation of your new corporation or if I can be of any further assistance to you.

Very truly yours,

 

 

[ATTORNEY'S NAME]