The simple answer is to reinforce corporate formalities. The regular observance of corporate formalities is an important aspect of maintaining the protections and advantages of being incorporated, not the least of which is the protection of shareholders against personal liability for the financial obligations of the corporation. Three of the most important areas of corporate formalities are shareholder decision making, director decision making, and separation of corporate assets from personal assets. For example the corporation should never pay the shareholders or directors personal expenses from the corporate bank accounts.
Federal and state tax returns, employment tax returns, and annual reports and similar filings are also required, depending on where the corporation is incorporated and qualified to do business. The shareholders should take action to elect the board of directors of the corporation annually. In addition, certain specified fundamental changes in the corporation require the consent or approval of the shareholders, including, but not limited to:
1. Amendment of the Articles of Incorporation.
2. Sale of all or substantially all of the assets of the corporation.
3. Merger or consolidation of the corporation with or into any other corporation.
4. Winding up and dissolution of the corporation.
Matters of more general operating policy should be considered and authorized by the company’s board of directors. Although there is no statutory requirement with respect to how frequently the board of directors should act, it is typical that the board meets at least annually if not quarterly and calls special meetings in which action is required before the next regular meeting.
Matters appropriate for director action include the following:
1. Annual appointment of officers, setting of salaries, and declaration of bonuses.
2. Corporate borrowing and the giving of security in connection therewith.
3. Contracts for the acquisition or lease of significant assets or services or the disposition of assets, or for the rendition of services outside the ordinary course of the business of the corporation.
4. Policy decisions with respect to the corporation’s operating budget.
5. The adoption of pension, profit-sharing, bonus, and other employee benefit plans.
6. The declaration of dividends or the redemption of shares.
7. Amendment of the bylaws.
8. Review of financial statements of the corporation and appointment of auditors, if any.
9. Any action that requires a shareholder vote.
10. The issuance and sale by the corporation of additional shares or the grant of options to purchase additional shares.
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