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Prepared By: Melissa C. Marsh, Los Angeles Business And Corporate Attorney
Written: March 2009

Don't Lose Your Personal Limited Liability Protection!
Inquire About our New Corporate Compliance Plan

California law generally provides all shareholders and directors of a corporation with personal "limited liability protection." The key word being "limited." Unfortunately, when the shareholders of a California corporation fail to follow the corporate formalities, creditors and claimants can "pierce the corporate veil" and hold the shareholders personally liable for the corporation's debts and obligations. In such cases, the court's often find that the shareholders and directors were operating the California corporation merely as the "alter-ego" of its shareholders and will "pierce the corporate veil" and allow the claimant to obtain a judgment against not only the corporation, but also the individual shareholders for what should have been an exclusive debt, or obligation, of the corporation.

Four Absolutes to Maintaining Your Corporate Limited Liability Protection.

The four most important corporate formalities all California corporations (even S-Corporations with only one shareholder) must adhere to, to maintain the corporate shield (personal limited liability protection) are:

1. Issue stock to the shareholders and adequately capitalize the corporation so it is not dependent on routine loans from shareholders (make sure each shareholder pays a reasonable amount for his or her shares to properly capitalize the corporation);
2. Never use corporate money to pay personal debts or expenses (and vice versa);
3. Maintain separate corporate financial records and bank accounts (do not comingle your corporate funds with your personal money); and
4. Properly notice, hold and document meetings of the shareholders and the board of directors at least annually, and properly notice, hold and document special meetings of the board of directors whenever a significant corporate act occurs, (e.g. getting a corporate credit card, adopting a trade name (DBA), loaning money to the corporation, leasing new office space, increasing or decreasing an officer's salary, or declaring a dividend).

If your California corporation fails to properly notice, hold, and document the required annual shareholder meeting and special board of directors meetings before engaging in important corporate acts, you may lose your personal limited liability protection. If lost, the shareholders of the corporation may become personally liable for the corporation's debts and responsibilities. In addition, the Internal Revenue Service, in the event of an audit, may reject some claimed deductions, and worse may reclassify an expense or loan as income which will lead to increased taxes and penalties.

Notice of Meetings.

The annual shareholders meeting and the annual board of directors meeting must take place at the time stated in the corporation's bylaws. A written notice of the annual shareholder meeting must be sent to all of the shareholders of record 30 to 60 days before the meeting date specified in the corporation's bylaws. The notice of the annual shareholders meeting must set forth the date, time and place of the annual shareholders' and the actions that will acted upon at the annual shareholder's meeting. At the annual shareholders meeting, the shareholders typically elect the board of directors for the ensuing year.

The annual board of directors meeting, similarly must be noticed and must be held on the date, time, and place stated in the corporation's bylaws. At the annual meeting of the board of directors, the directors will appoint the officers of the corporation for the coming year and set their salaries. The board of directors may also decide if dividends will be declared, and if so in what amount, and they vote on any other annual decisions regarding the financial matters of the corporation, so long as they were properly noticed.

Special meetings of the board of directors, and in some cases, the shareholders, must also be preceded by a written notice at least 10 days before a special meeting is set to take place. The written notice must specify the date, time, and place of the meeting as well as a general description of the matter(s) to be discussed and voted upon at the special meeting.

Annual Shareholder Meeting and Annual Board of Director Meeting.

California law requires ALL California corporations, even those owned by a single shareholder, to hold an annual meeting of the shareholder(s) for the purpose of electing the board of directors. As most corporate actions related to the operation of the corporation are effectuated by the board of directors, and not the shareholders, it is also important for a California corporation to hold not only the annual meeting of the board of directors, but also several special meetings of the board of directors throughout the year. This is extremely important for corporations with a single director, as the courts are more apt to pierce the corporate veil of such corporations.

Special Meetings of the Board of Directors and Shareholders.

Special meetings of the board of directors should be common with small corporations. The corporation should hold a special board of directors meeting whenever a significant corporate act takes place, such as: approving a major contract; executing or terminating an employment agreement with a key employee; borrowing or loaning money; acquiring a line of credit; issuing stock; declaring a dividend; executing an equipment lease, auto lease, or real property lease; or initiating, defending or settling a lawsuit, etc.

The corporation must also hold a special shareholder meeting whenever the board of directors has a significant item of corporate business that requires shareholder approval, such as amending the articles of incorporation, amending the bylaws, and selling or transferring all, or substantially all, of the corporation's assets.

Special Note About Shareholder Loans.

If your corporation has loaned money to a shareholder, or borrowed money from a shareholder, the loan must be approved by the Board of Directors during a Special Board of Director’s Meeting. This is true, even if you are the sole shareholder and sole director. The loan must also be evidenced by a promissory note and either a record of the meeting, or a unanimous written consent. If the corporation is audited, the I.R.S. will ask to see the promissory note and the corporation's minute book and if the loan is not properly documented, the I.R.S. may treat the loan as a nondeductible corporate dividend and as taxable income to the shareholder.

If your corporation has entered into loans with its shareholders, and you would like us to prepare the appropriate documentation, please contact us at 818-849-5206 or Send us an Email.

Minutes and Unanimous Written Consents.

It's not enough to just notice and hold a meeting. When the corporation holds a meeting of the shareholders, or directors (as the case may be), the corporation must prepare either (1) minutes of the meeting, or (2) Actions by Unanimous Written Consent and have the minutes (consents) signed by all of the corporation's shareholders, or directors (as the case may be).

Corporate minutes and consents serve as the corporation's proof that all corporate matters and major decisions have been properly discussed and acted upon at a corporate meeting. The minutes of meetings, or consents, must clearly set forth what actions were considered, what resolutions were passed, and how each of the shareholders, or directors, voted on each resolution. The minutes should be signed by either the shareholders (shareholder meeting), or the directors (board of directors meeting) and placed into the corporate minute book along with copies of the notices of the meeting sent to all of the shareholders and directors (or Waiver of Notice).

Why the actual wording of your corporation's Minutes, or Unanimous Written Consents, Are So Important.

Corporate minutes are private, until someone suing you subpoenas the records, or the IRS conducts an audit and requests copies of your corporate minute book. It is therefore crucial to word your minutes effectively so they contain sufficient detail to offer you protection in the event of a lawsuit, or an IRS audit, but do not contain too much detail, so as to cause harm. If you are going to prepare your annual and special minutes yourself, choose your words carefully. For example, the wording used to document a corporate resolution may justify and support a particular tax deduction, and in turn help you in the event of an IRS tax audit, but it may also flag an issue for a tax auditor and bring attention to a matter you would prefer not to have questioned in an audit. If you would like us to prepare either your annual or special minutes of the Board of Directors and Shareholders, simply call 818-849-5206, or Send us an Email.

Be sure to check out our Corporate Meeting and Minutes Compliance Plan first, as it could save you a tremendous amount of headache and money in the event you, or your corporation, are later sued, or audited.

Minute Book.

A California corporation is also required to maintain a corporate minute book that contains copies, or originals, of all the signed and approved minutes of annual and special meetings of the shareholders and the directors, or Actions by Unanimous Consent. While this does not have to be a formal corporate kit, it should be an actual book or binder. In addition to all of the corporate minutes, the minute book should also contain copies of every document filed with a government agency, all promissory notes, and corporate contracts (e.g., your office lease).

Three Reasons to Use Our Corporate Meeting and Minutes Compliance Plan:

1. Peace of Mind. You can be assured that your notices of meetings, and your minutes of meetings, or unanimous written consents, will get prepared in a timely manner by an attorney.
2. Insurance. It's is a cheap form of insurance to ensure you maintain your personal limited liability protection. The cost is only $499 a year.
3. You won't do it. Despite good intentions, the majority of small business corporations invariably fail to properly prepare the documents.

Need Corporate Clean Up? We can help.
If you have lost your corporate minute book, or failed to keep proper records, Call Melissa C. Marsh, a Los Angeles, California Business Law Attorney at 818-849-5206, or Send us an Email.

Need your annual minutes prepared, or special minutes of the board of directors? We can help.
If you would like a telephone consultation with Melissa C. Marsh to discuss what minutes your corporation needs prepared, or possibly subscribing to our Corporate Meeting and Minutes Compliance Plan, call 818-849-5206 or Send us an Email

Related Articles:

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• A California Corporation Provides Asset Protection, But It Can Be Lost - Piercing the Corporate Veil

Related Services:

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• Corporate Meeting and Minutes Compliance Plan Service
• In House Counsel Plans Designed For The Small Business
• $129* Telephone Consultation

California business lawyer, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and serves individuals and businesses throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.

© 2009 Melissa C. Marsh. All Rights Reserved.