Many business owners choose to incorporate or form a Limited Liability Company (LLC) to protect their personal assets from business creditors. In order to limit personal liability, entities must respect specific corporate formalities. Among these include complying with annual filings, avoiding the mixing of company funds with the owners’ assets, holding required meetings and using corporate resolutions to document the company’s major decisions. Failure to follow the rules can expose both the corporation and LLC owners to lawsuits, thereby resulting in significant personal and business losses.
A resolution is a written record of certain decisions or actions taken by the company. Shareholders and directors of a corporation can vote to adopt such business motions. Similarly, members or managers in an LLC structure have voting authority to adopt resolutions. The decision to move forward with the use of a corporate written motion is generally done through a vote by company shareholders. While voting on such resolutions typically occurs at a meeting, matters can also be approved in writing by a majority of shareholders. If the resolution passes, it should be saved along with the meeting minutes (i.e., the recorded notes from a meeting) and other corporate records.
Typically, resolutions are necessary as part of the initial incorporation process. Such written motions also prove required consent for the major decisions of corporations. From a company’s inception, the Directors’ and Shareholders’ Initial Resolutions authorize the company’s incorporation, list the original corporate officers and approve the preliminary amount of stock authorized by the Certificate of Incorporation.
Additionally, corporate resolutions may be used to approve company activities, after the fact. In ratification, a vote takes place during a meeting (or in writing in lieu of holding a meeting) to authorize a decision or act made by corporate officers prior to that meeting. Resolutions are not used for day-to-day matters.
Other major decisions that might require resolutions include buying or selling real estate, accepting additional stakeholders, issuing new stock, amending bylaws (i.e., the rules that govern a corporation’s operating procedures), taking out a loan, hiring or firing C-suite executives, approving SEC filings, registering intellectual property rights and other important matters.
While there is no statutory mandate for LLCs to adopt resolutions, members or managers should strongly consider their use for similar reasons discussed above. In contrast, resolutions are required for corporations.
A corporation’s bylaws or an LLC’s operating agreement detail a company’s regular operations. These include specifying how the company will be run and in what manner business decisions will be made, who has the power to perform certain actions, requirements for holding meetings and other matters. The bylaws and operating agreement are approved once (through a corporate resolution) and can be amended during the life of the entity.
In contrast, corporate resolutions are adopted for every major decision, as needed. Their purpose is to demonstrate that the board is acting in accordance with its legal obligations, including those set forth in the operating agreement or bylaws.
While these documents serve different purposes, they are all formalities that companies must observe under the law.
Resolutions help prove that the company is acting in compliance with federal and state laws, as well as its own operating agreement and bylaws. Importantly, they also document that the company’s affairs are being kept separate from the personal affairs of its shareholders, as maintaining a “veil” between the company and its owners is what affords owners their limited liability. This, in turn, protects shareholders and board members from personal liability if faced with a plaintiff looking to “pierce the corporate veil.” When owners have not demonstrated this separation, they could become financially responsible for the acts of their corporate entity, including any debts owed. For instance, the Fifth Circuit Court pierced the corporate veil when a defendant-corporation made substantial loans to its subsidiary company – at one time amounting to $7 million – without any corporate resolution authorizing these loans. See U.S. v. Jon-T Chemicals, Inc., 768 F.2d 686 (5th Cir. 1985).
Allowing shareholders to vote on and memorialize resolutions helps establish this necessary detachment between a corporation and its owners. To ensure decisions are being made separately and in the interest of the corporation, additional best practices include: holding annual shareholder meetings, regularly holding board of directors meetings, keeping meeting minutes, maintaining and updating bylaws as appropriate, timely complying with state filing requirements, issuing stock certificates for shareholders of closely-held corporations and documenting why money is coming in and out of the company.
Corporate requirements can be complex, and mistakes can be costly for companies and their owners. Whether you are launching a new company or are already in business, consider working with an experienced business attorney who can help you navigate the laws pertaining to your company’s specific situation. Contact a member of our team for next steps.