Many businesses believe that so long as they pay their annual taxes and any fees to the California Secretary of State, they are maintaining their corporate liability shield. Unfortunately, that might not be the case.

Under California Corporations Code, a corporation must also comply with corporate formalities in order to protect the liability that a corporation affords. One such formality is that of holding an annual meeting of the board of directors and an annual meeting of the shareholders. Regardless if you are the only director or shareholder, under California law, you are required to hold these meetings at least annually. Annual meetings usually act as a summary of all the company has done in the past year, and can be as short as a few pages.

Since one of the main reasons business owners incorporate is to be able to shield their personal assets from the debts of their corporation, it only makes sense to take the minimal time required to memorialize your annual meetings now than to deal with potential problems in the future. If you do not maintain proper corporate records, an adverse party could “pierce the corporate veil” of your corporation and reach your personal assets.

Another issue that could arise is if the IRS were to conduct a tax audit and find that corporate formalities were not followed, they can reject corporate deductions. The IRS could also require you to pay penalties for failing to maintain your corporate records.

If you are thinking of selling your business, more often than not, the potential buyer will want to inspect your corporate binder and your corporate minutes to make sure they are not assuming any unknown liabilities. Another instance where your corporate binder might be inspected is when you are seeking financing. The bank will want to ascertain whether or not you have been properly managing your corporation.

It might seem bothersome to prepare these annual meetings of shareholders and the board of directors, but by doing so you are making sure that your corporate shield is in tact. If you need help with preparing your corporation’s annual minutes or want to know what else needs to be done to comply with corporate formalities, please feel free to call us at (818) 956-9200 to set up a complimentary initial consultation.818.956.9200

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616 E. Glenoaks Boulevard, Suite 203

Glendale, CA 91207

Sherman Oaks Location

15303 Ventura Boulevard, Suite 900

Sherman Oaks, CA 91403