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ON LAW — 7 steps to maintain corporate formalities

Jim Shelson

Jim Shelson

Is your business ready to go to the next level? Are you considering filing for incorporation?

To do so, you must first file Articles of Incorporation with the Mississippi Secretary of State, which can be done on its website at sos.ms.gov. After the Articles of Incorporation are filed and the corporation is formed, an organizational meeting is held, bylaws are adopted, and officers and directors are elected.

What are the advantages? Chiefly, a corporation is limited liability. That is, the corporation, and not its individual shareholders, are liable for the corporation’s actions. Under extraordinary circumstances, such as fraud, the corporate form can be disregarded and individual liability can be imposed. Failing to observe corporate formalities can result in the shareholders and the corporation being treated as one and the same if it is found that the corporation failed to operate as a separate corporate entity.

One way to guard against this is to observe corporate formalities. The basic steps to observe corporate formalities include the following:

» Hold annual meetings. A corporation must hold an annual shareholders’ meeting and an annual board of directors’ meeting. The time and place of these meetings is typically set forth in the bylaws.

» Keep corporate minutes. Minutes or notes of the meetings of the board of directors must be maintained in a Corporate Minute Book. Minutes of special shareholders meetings also must be kept. It is essential to maintain corporate minutes. They can become especially important when the corporation is sued and the corporate form is sought to be disregarded in favor of individual shareholder liability. They can also be important if the corporation is audited by the IRS.

» File annual reports. A corporation must file an annual report with the Mississippi Secretary of State, which has a form for annual reports on its website. Take note, all annual reports must be filed online. An annual report can be filed any time on or after January 1 of the calendar year and is due by April 15 each year. Corporations that fail to file a corporate annual report will be administratively dissolved.

» Observe voting requirements. Shareholders must elect directors and vote on changes to the corporate structure, such as mergers, amendments to the Articles of Incorporation and dissolution of the corporation. The number of directors must be set forth in the Articles of Incorporation or the bylaws, while corporation officers typically are appointed by the board of directors.

» Discharge duties to the corporation. The officers and directors of a corporation must discharge their corporate duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances Officers and directors act in a fiduciary capacity to the corporation, so they owe a duty of loyalty to the corporation. In this regard, they must put the corporation’s interests ahead of their own. Officers and directors cannot divert corporate assets or opportunities for their personal gain.

» Don’t commingle. Corporate and personal funds should never be commingled. The corporation should have its own bank account, and only corporate funds should be maintained in that account. In turn, corporate funds should be used only for corporate purposes. All corporate contracts should be signed in the name of the corporation, and purchases should be made in the name of the corporation. Do not use corporate funds for personal purchases or loans.

» Document transactions with written agreements. Written agreements for all major transaction, such as loans, real estate and other significant purchases or leases, and employee benefit plans,  should be signed and maintained.

Observing corporate formalities can go a long way in preventing the corporate form from being disregarded and the shareholders held personally liable for the acts of the corporation.

» James W. Shelson is an attorney with Phelps Dunbar LLP in Jackson, Mississippi, focusing on a range of commercial litigation matters including toxic torts, products liability, business torts and commercial disputes, consumer finance and lender liability, coverage disputes and bad-faith claims.

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