Doing Business as a Corporation
Discussed below are some of the major features of doing
business in corporate form.
One of the important benefits of doing business as a
corporation is the limited liability you have for corporate obligations.
Careful observation of corporate formalities, including many of the
following procedures, are necessary in order to retain the limited
liability protections. Should you have any questions concerning this
memorandum, please contact us.
Lawful Activity.
The Articles of Incorporation permit the corporation
to carry on "any lawful business". This is a general statement of
purposes permitting the corporation to carry on activities related
to its principal business, or even to change business altogether without
violating its corporate articles.
Accounting.
It is the responsibility of the officers and directors
of the corporation to make certain that accounting practices and auditing
procedures customarily followed by similar businesses are observed
in proper and timely fashion by the corporation. Accordingly, the
corporation's accountant should be kept current and consistently informed
regarding all of the corporation's business activities.
The accountant should, moreover, assist the corporation
in meeting all record-keeping requirements (i.e., filing initial and
annual reports with the Secretary of State), including tax returns,
imposed upon the business by reason of its incorporation. Your accountant
should set up corporate financial records and may advise the personnel
doing the bookkeeping work for the corporation, as needed.
The accountant may prepare, or assist in the preparation
of, necessary budget and cash forecast data and respond to questions
regarding transfers of accounts receivable and the payment of accounts
payable. Any assets transferred to the corporation upon incorporation
should be appropriately entered upon the books of the corporation,
and any assets so transferred become the property of the corporation.
Preliminary
Steps to be Taken.
The following initial steps must be taken immediately
prior to or at the time of commencing business in corporate form:
- Within 120 days of the date on which the articles of incorporation
are filed, an initial report must be delivered to the Secretary
of State. This report should include (1) the name of the corporation
and state in which it is incorporated; (2) the street address of
the corporation's registered office and the name of its registered
agent in the state of Washington; (3) if the corporation is foreign,
the address of its principal office in the state in which it is
incorporated; (4) the address of the corporation's principal place
of business in this state; (5) the names and addresses of the corporation's
directors; (6) a brief description of the nature of the corporation's
business; and (7) the names and addresses of the corporation's chairperson
of the Board of Directors, president, secretary, and treasurer,
or of individuals, however designated, performing the functions
of such offices.
- Any existing letterhead, signs, billheads, business cards, etc.,
should be modified or changed to reflect the full name of the corporation.
If the words "Incorporated" or "Inc." have simply been added to
an existing business name, old stationery may continue to be used
if the word "Incorporated" or "Inc." is added, either by typewriter
or by rubber stamp. Otherwise, the stationery should be completely
replaced at once.
- The bank checking account should reflect the corporate name. A
new bank account opened in the name of the corporation on bank signature
cards and forms provided by the bank should have been authorized
in the minutes of the first meeting of the Board of Directors. Obtain
several copies of the new corporate account resolutions, signature
cards, and other required authorizations, complete the forms and
return them to the bank. A fully completed duplicate copy of the
banking forms should be inserted in the minute book of the corporation
as an attachment to the minutes of the first meeting, if this has
not already been done.
- Any existing loans made for the business should be transferred
to and assumed by the corporation when and if it is determined that
no adverse tax consequences will result from such assumption of
liability. New loans made after commencing business in corporate
form should be made in the name of the corporation, even though
personal guarantees may be required. Whenever such a loan is made,
it should be approved by a meeting of the Board of Directors and
an appropriate resolution adopted and inserted in the minute book
of the corporation. If personal loans are made to the corporation,
they should be fully documented in the minutes and financial records
and a promissory note issued by the corporation.
- Any existing telephone listing or other listing in any directory
should be changed to reflect the corporate name as the opportunity
arises.
- All leases, contracts, and other arrangements regarding existing
equipment, office premises, or furniture and any other contracts
or arrangements previously entered into in connection with the business
should be modified, assigned, or rewritten in order to reflect the
fact that the corporation is now the contracting party to each such
lease, contract, or obligation.
- Necessary business insurance (public liability, disability, workers'
compensation, and general) must be acquired by the corporation,
either by assignment or binder. Accordingly, an analysis of insurance
requirements should be made and the corporation's insurance agent
or broker instructed to make such transfers or purchases of new
coverage immediately upon the commencement of business by the corporation.
- All required federal, state, and local business licenses
and registrations should be obtained. This includes making application
for a federal employer identification number, registering with the
Washington Department of Revenue, and opening accounts with the
Washington Department of Labor and Industries for workers' compensation
insurance and the Washington Employment Security Department for
unemployment coverage, if necessary. In addition, many cities and
counties require businesses operating within their jurisdiction
to obtain an operating or business license.
- All contracts should be entered into in the name of the
corporation. Contracts, checks, and other documents should be signed
in the name of the corporation followed by the word "By" with a
space for the name and title of the officer signing on behalf of
the corporation. A standard example of a proper signature format
is:
XYZ Corporation
By ___________________________
Its President
This is extremely important since it is clear evidence that the
contract, check, or other document was that of a corporation and
that the person signing is not personally liable.
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Corporate
Formalities; Records and Reports.
It is extremely important to maintain the formal integrity
of the corporation as a separate legal person from its shareholders.
Failure to observe corporate formalities may cause the corporation's
separate legal existence to be disregarded, resulting in personal
liability for those conducting the business.
Required
Records and Reports.
All important business transactions should be reflected
in the minutes of meetings of the Board of Directors or shareholders,
even where there is only one director or shareholder. Minutes should
be kept as permanent records. A record should also be kept of all
actions taken by shareholders or the Board of Directors without a
meeting and all actions taken by a committee of the Board of Directors
exercising the authority of the Board of Directors on behalf of the
corporation. These records should be maintained in written form or
in a form capable of conversion to written form within a reasonable
time.
All contracts, including employment contracts, buy-sell
agreements, profit sharing plans, pension plans, trust agreements,
loans, leases, purchase contracts, and corporate brokerage and investment
accounts should be made in the name and on behalf of the corporation
and memorialized by appropriate signed minutes in the corporate minute
book. The corporation should also maintain a record of its shareholders,
in alphabetical order by class of shares, showing the number and class
of shares held by each shareholder. You and your attorney should decide
whether to maintain the minute book at your attorney's office or at
your company.
A copy of the following records should be kept at the
corporation's principal office:
- Articles or restated articles of incorporation and all amendments
to them currently in effect.
- Bylaws or restated bylaws and all amendments to them currently
in effect.
- Minutes of all shareholders' meetings and records of all actions
taken by shareholders without a meeting in the last three years.
- Financial statements for the past three years: a balance sheet
showing in reasonable detail the financial condition of the corporation
as of the close of its fiscal year; an income statement showing
the results of the corporation's operation during its fiscal year.
- All written communications to shareholders generally within the
past three years.
- List of names and business addresses of current directors and
officers.
- Initial report or most recent annual report delivered to the
Secretary of State.
These records and reports may be made available to a shareholder
upon a proper request by the shareholder.
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Actions
Requiring Formal Consideration or Review.
It is most important to realize that the corporation will be required
formally to consider, review, and act upon the following matters:
- Salary and Bonus. Normally, the salaries of the
President and other principal officers should be adopted formally
by the Board of Directors, and each change should be reflected in
the minutes. If the corporation has a pension or profit-sharing
plan, the Board should authorize the amount of each year's contribution.
This may involve consideration of whether the corporation has generated
adequate profits to allow a contribution. To claim a deduction,
whether the corporation is a cash or accrual basis taxpayer, the
contribution must be made by the deadline for filing the corporate
tax return or any extensions thereof.
- Issuance of Additional Shares of Stock. The Board
of Directors has exclusive power to authorize issuance of additional
shares of the corporation's stock. No more than the number of shares
authorized by the Articles of Incorporation may be issued without
action of shareholders amending the Articles to increase the authorized
shares. If the corporation has preemptive rights or restrictive
agreements, consents or waivers must also be obtained.
- Use of Corporate Seal. Although there is no legal
requirement that a corporate seal be used on any documents under
Washington law, many financial institutions require that you use
this in connection with corporate resolutions, loan documents, notes,
and the like. There is a place for the corporate seal, for example,
on your stock certificates.
- Registered Agent and Office. The Articles of
Incorporation provide an initial registered agent and registered
office. The Registered Agent is the person upon whom formal suit
may be served and his or her office must be the Registered Office.
The Registered Office will be the address to which official communications
from the Secretary of State will be sent. The Registered Office
may not be a post office box unless you also provide a geographic
address within the same city as the post office box. In the event
of a change of address or agent, you must have a resolution of the
Board of Directors appointing a new Agent and Office and a form
must be filed with the Secretary of State.
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Corporate Rules.
Many questions regarding the corporate formalities can be resolved
by appropriate reference to the Bylaws, employment contracts, and
other documents which are to be found in the minute book.
Outline
of Directors' and Officers' Responsibilities.
Principal officers and directors of every corporation must be mindful
of the following specific and important duties and responsibilities:
Payroll
Taxes.
All payroll taxes must be paid by the corporation. Nonpayment may
result in personal civil or criminal liability by the officers and
directors.
Loans
to Officers and Directors.
If the corporation loans money to any of the officers or directors
of the corporation, the loan must be first approved by the holders
of a majority of the voting shares or by the board which must have
determined that the loan, or a general plan of loans, benefits the
corporation, and minutes of the meeting must be filed in the minute
book. If such approval is not obtained, all directors can be personally
liable for that loan if it is not repaid.
Duty
to Inspect.
A director has the absolute right to inspect all corporate books,
records, documents, and property at any time. A director who is uninformed
as to these matters may be held liable for negligence in the event
that the corporation suffers loss or its creditors suffer loss by
reason of failure to exercise due diligence.
Distinction
Between Directors and Officers.
- Election and General Duties. Shareholders elect
directors. Directors elect or appoint officers. Directors control
the policy of the corporation and officers put the policy into effect.
This difference must be understood.
- Delegation of Authority and Removal. A director
may not delegate his or her authority or give a proxy to vote at
a meeting of the Board of Directors. An officer may delegate his
or her responsibility and authority. Unless the articles of incorporation
provide otherwise, a director's removal may be with or without cause.
Even though an officer may have an employment contract which provides
rights to compensation, that officer may be removed from office
at any time by the Board of Directors. A director, on the other
hand, may be removed only by the action of the shareholders under
specific procedures.
- Compensation and Salary. Directors establish
salaries, not shareholders, and do so in formal meetings. A director
is ordinarily not entitled to compensation for services as a director
unless the compensation is provided for by contract, by an appropriate
bylaw, or by a corporate resolution. Directors have the additional
power to fix the salary of each and all of the officers. Certain
compensation plans, such as stock option plans, must be submitted
to the shareholders as well as to the directors for their approval
and ratification. This corporate formality must be followed even
where the directors and shareholders are the same persons.
- Dividends and Issuance of Shares. It is the directors
who have the power to declare dividends, not the officers. Issuance
of shares is also within the exclusive province of the Board of
Directors. Before issuing shares or declaring dividends, however,
it is wise to consult with the corporation's counsel since there
are complex statutory inhibitions upon the issuance of shares and
the declaration of dividends that must be observed.
- Resignation. A director or officer may resign
at any time. Acceptance of the resignation is not necessary. A resignation
is effective upon the delivery of the resignation to the corporation.
It need not await acceptance by the Board of Directors or by any
officer. The remaining directors may appoint a new director to fill
a vacancy without the action of shareholders.
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Director's
Duties to Corporation and Shareholders.
A director may not compete with the corporation or take business
opportunities of the corporation for his or her own benefit. All such
transactions will probably have to be disclosed to the shareholders
of the corporation where there is any difference between the officers
and directors, on the one hand, and the shareholders on the other.
Such disclosures can best be memorialized by an entry in the minutes
of a meeting.
The directors of a corporation must be concerned with all sources
of liability which include improper declaration of dividends or repurchases
of shares; fraudulent entries in the corporate books or reports; failure
to properly supervise the operations of the corporation; and failure
to pay compensation to employees or to properly withhold payroll taxes.
Each director should make certain that the corporation is in good
standing with the taxing authorities and the Washington Secretary
of State; and that the affairs of the corporation continue to be conducted
in compliance with the law and all applicable rules and regulations
of the agencies regulating the business in which the corporation is
engaged. Finally, the corporation must obtain and continue to provide
and maintain security by insurance or otherwise for claims arising
out of the conduct of business by the corporation.
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Annual
Meeting and Report.
Each year the corporation must hold an annual meeting of the shareholders,
as provided in the Bylaws, elect directors, prepare minutes, and file
an annual report on a form submitted by the Secretary of State. Sample
Board consent resolutions are attached as Exhibit A.
Death or Withdrawal of a Shareholder.
In the event that a shareholder should die, the estate of the shareholder
becomes the owner of the stock. In the event the corporation wishes
to redeem these shares, formal action of the Board of Directors will
be required.
"Buy-sell" agreements are frequently used by corporations having
a small number of stockholders to establish in advance what will occur
in the event of death or the desire of a shareholder to sell his or
her stock. You should consider the desirability of a buy-sell agreement,
and the appropriate terms for one, any time you admit a new shareholder
or when the financial picture of the corporation changes substantially.
Termination
and Dissolution of Corporation.
Neither the corporation nor its employee benefit or compensation
plans should be terminated or dissolved without prior consultation
with counsel. The corporation is not dissolved by reason of the death
of any or all of the shareholders. Dissolution is accomplished only
as provided by the general corporation law of the state of Washington.
In the event of an administrative dissolution of the corporation,
the corporation may be reinstated within five years after the date
of dissolution if certain requirements are met. Under some circumstances
the attorney general or shareholders may bring a proceeding to cause
dissolution of the corporation. In any event, dissolution of the corporation
does not necessarily take away a remedy available against the corporation,
its directors, or shareholders for claims existing prior to dissolution.
• • •
This memorandum has attempted to highlight the key formalities, procedures,
and responsibilities of doing business in corporate form. Since it
likely does not anticipate every question you may have or concern
with which you may be faced, please feel free to contact Joel
N. Bodansky.
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• • •
EXHIBIT A
CONSENT TO ACTION IN LIEU OF
SPECIAL MEETING OF THE BOARD OF DIRECTORS
OF
XYZ, INC.
________________, 20__
Pursuant to RCW 23B.08.210 of the laws of Washington, the undersigned,
being all of the Directors of XYZ, Inc., a Washington corporation
(the "Corporation"), hereby waive notice and consent to and take
the following actions without a meeting:
APPROVAL OF CONTRACT [OR LEASE]
RESOLVED, that [describe contract
or lease], in form reviewed by the Board is deemed to be in the
best interest of the Corporation and is hereby approved and accepted.
The appropriate officer is authorized to execute such agreement.
Execution of such agreement by the designated officer shall be conclusive
evidence of such approval and acceptance.
Dated as of the date set forth above.
[Attach signatures of all directors.]
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