Corporate Formalities: Everything You Need to Know
Corporate formalities are the operating rules and guidelines a corporation must follow in order to meet its operational requirements, which in turn will allow it to maintain the corporate protections it enjoys.3 min read
Corporate Formalities Overview
Corporate formalities are the operating rules and guidelines a corporation must follow in order to meet its operational requirements, which in turn will allow it to maintain the corporate protections it enjoys. If it is found that a corporation has not met its obligations toward corporate formalities, a court may rule that a corporation is acting unlawfully and that the owners should be held accountable, which could mean a wide variety of penalties, including fines or even a revocation of the right to operate as a corporation.
Common Corporate Formalities
Corporate formality requirements can vary a great deal depending on the state and the type of corporation. However, one of the most important formalities for most corporations involve the bylaws, which are internal rules that govern the running of a corporation. They define the corporation’s purpose, as well as the responsibilities and duties of those tasked with managing the corporation. Specific details covered in bylaws may include:
- The time, location, and frequency of officer meetings, shareholder meetings, and board of director meetings.
- Attendance and quorum (majority vote) requirements for meetings.
- How the board of directors will be established, including how many member it will have and who will be a member.
- How officers will be selected.
- How committees will be formed and run.
- The length of a director’s term.
- How a director vacancy will be filled.
- Job descriptions for such positions as President, Vice-President, Treasurer, and Secretary.
Bylaws usually do not cover the number of issued shares or any personal information related to individual directors, officers, or shareholders. This information is more appropriate for meeting minutes, the stock ledger, or bills of sale.
Other common areas in which corporations are required to meet formalities include:
- The bank account. A corporation must have a bank account separate from that of any individual involved with the corporation. There can be no mingling of business and personal funds.
- The business name. Corporate business conducted with third parties must be done in the name of the corporation, not any individual associated with the corporation. This is to make it clear that action is being taken in the name of the corporation, not any of its individual members.
- Scheduled meetings. Corporations must hold an annual meeting for the shareholders, as well as an annual meeting for the board of directors. The date, time, and other details of this meeting should be laid out clearly in the corporation’s bylaws.
- Special meetings. If an important corporate decision must be made, a special meeting (or meetings) must be held. Such decisions could include changing officer salaries, entering a new business venture, or opening a new bank account. Due notice should be given to the concerned parties for such meetings.
- Record keeping. Accurate financial records and meeting minutes should be kept by the corporation. This will help curb the abuse of corporate assets and will be very useful if any legal issues arise.
Corporate Document Formalities
Along with the proper actions you must take to correctly run your corporation, there are a number of corporate documents that should be used in the appropriate situations. Aside from the Articles of Incorporation, which is used to establish your corporation, important corporate documents include:
- The Letter of Resignation of Incorporator. This document is used when the incorporator resigns from their position upon completion of the corporate registration process. It will list the names of the corporation’s initial directors and include a statement of resignation by the incorporator.
- Bill of Sale. This is issued by the board of directors when authorizing a sale of corporate shares. It will go out to all shareholders during a new issue of stock.
- Corporate Resolution. This is a document highlighting a corporate action that has been passed by the board of directors. It could cover who has been authorized to act on the corporation’s behalf or the details of the sale of corporate real estate.
- Certificate of Incumbency. This document confirms the identity of a corporation’s signing officer. It will sometimes also be used to confirm the names of shareholders or directors or the contents of the minute book. The document usually functions to prove that an individual has the authority to sign contracts for their corporation.
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