Corporation Essentials
How much insurance does my corporation need?
How much insurance do you need? That kind of question is like asking an individual how much life insurance they need, and I think it really depends. It depends on the nature of your business. Is it a business that has a lot of debts and a lot of incurrences? If you are just baking cookies out of your back yard, or out of your oven in your home, and you are giving them away to some of the kids around, or maybe selling them for a quarter, more than likely your chances of a very awful lawsuit are pretty low. I mean as long as you stick with your recipe and don't use bad ingredients. However, if you're out making pesticides or chemicals, and they're going to be spread across a really wide area, you've got a lot more liability that's potential, and a lot more people that can be harmed. So, you need to first off take a look at what your risk profile is, then you need to take a look at how much insurance you can afford. I always tell people that if you can afford it, you should try and get it. So you take a look at how much insurance makes sense, and if you can get that level of insurance, then go ahead and get it. A lot of times you can afford insurance just by increasing your deductible. So, for instance, if you're talking about general liability insurance, and you own a store, a retail store that people walk into, you might want to get an amount so that you would have one person every year would slip and fall in your store and sue you for $100,000. And that might be enough for you. You might be willing to accept $10,000, and pay that on your own. Now, there are other levels of insurance, and there's so much that you can get, and I would really recommend that you speak with an insurance professional on this. But in addition to general liability insurance, if you operate any sort of professional company, like a lawyer or doctor, you obviously want to get some malpractice insurance. Additionally you will want to get director and officer, or what's called D & O insurance. That means that actions that are taken by your directors and officers, if they are taken within the scope of the company's business, that they're going to be protected and not personally liable for their decisions. On top of that there's insurance called E & O, which is errors and omissions. E & O insurance covers you doing a bad job. So it's not that someone gets hurt or there's liability from a slip and fall, but if you make a product and that product ends up not being good and you get sued for it, then you can get errors and admissions insurance. Essentially, you can get insurance for just about anything if you're willing to pay for it. So, once again, what you'd like to do, or what I think everyone should do is take a look at what their risk profile is, where they believe any lawsuits, or damages, or liability would be coming from, and then plan on how much insurance they would need per year, and then get that level of insurance, as much as you can afford from as good of a company as you can afford to get it from.
How should I conduct corporate meetings?
Conducting of corporate meetings, and let's just talk about board of directors meetings first because obviously, there are shareholder meetings, board of director meetings, meetings with the officers, the president and CEO of the company, but I'm going to focus on the board of directors meetings. Now, the corporate formalities that you have is holding regular meetings. In most states, shareholder meetings and board meetings are required at least annually. I tend to recommend that if you're one of those companies that needs to meet about a lot of things to kind of do it monthly, or at a minimum you might want to do it quarterly. So let's assume that every quarter you have a meeting. Well, the meeting is going to be conducted in accordance wtih the company's bylogs. The bylogs will set out what notice needs to go out, what the notice should say, when the meeting can be held, how it can be adjourned and what business you might want to talk about. In most states the notice needs to go out between ten and sixty days of the meeting, so if you have a meeting on March 10th, any time from the last day of February to sixty days prior you can send out a notice. In that notice, you'd want to send it to all of the directors, and state what type of business you're going to be conducting. It's not necessary, but it's common courtesy to do so. Then at the meeting, the chairperson or whoever is the person that you select will call the meeting to order and there will be typically the secretary of the company or if you have a lawyer, the lawyer of the company, would record the minutes of that meeting and say what's transpired. They'll put down who attended, whether or not there was a quorum, a quorum being enough people to actually hold a meeting, and then how things were voted on, whether it was voted unanimously, or if there was a majority or if the vote failed. Then they'll state typically when the next meeting is going to be and what time that it was adjurned. And if there's any kind of irregularity or a problem or you need to take a break, a lot of times that can be handled in there as well. But not keeping up with corporate formalities like that can really get a company in trouble in what's called alter-ego liability or piercing the corporate veil.
What does it mean to "pierce the corporate veil"?
Piercing the corporate veil is what happens whenever a lawsuit, a creditor, or someone who has a judgment against you goes through your corporation, “the veil of the corporation”, and pierces it to get at you as a shareholder or director personally to make you personally liable for a corporate debt. Now as we talked about before, the reason why people have corporations or LLCs is that they want to limit their liability and not be personally liable, so obviously piercing the corporate veil is a very big concern for most people. There are a few ways that it can happen: number one, fraud. If you are flat out defrauding people in this state; if you get a California corporation and use it to run up some bogus scheme and defraud everyone out of a bunch of money, they're typically going to look right through that corporation and go right to you personally, because they're not going to let you hide behind a corporation that you didn't actually use. Number two is called “alter ego liability” and that is when you don't really have a corporation. You set one up, you might have even followed all the formalities in the beginning, but you're not using it as one. You're co-mingling your funds; you're essentially making the corporation an alter ego of you. The last one, which is kind of like alter ego liability, is when you fail to keep up a lot of the formalities, because failure to keep up the formalities is one of the things that a court will look at to determine whether or not there should be alter ego liability. So keeping up good meetings, good records, no co-mingling of funds, separating your personal and business accounts, having the actual real shareholder meetings where they elect directors, director meetings where they elect officers, and officer meetings where they run the business; it's very separate, and loans to individuals that are shareholders are very well scrutinised. If you keep all of those things in mind whenever you're having meetings and whenever you're conducting your business, it will really help prevent the piercing of the corporate veil. If piercing the corporate veil is something you're worried about, that is the one thing about which I would definitely say you'd want to talk to an attorney in your state, because some states are a little easier at piercing the veil than others. For instance I believe that in Nevada, in the twenty plus years that they've been keeping records on piercing the corporate veil, I don't know if it's happened more than one or two times, and the one that I do know about is when someone was out actively defrauding people in Nevada; stealing their money. So it can be rare in some states.
How should I sign documents that pertain to my corporation?
The first question you should ask is, do you have the authority to sign that document on behalf of the corporation? Not everyone does. If I have a company such as McDonald's and I have a separate company for my McDonald's franchise and I hire employees, they are my employees, but they do not necessarily have the ability to bind my corporate franchise. They don't have the ability to sign contracts with vendors or to order more french fries or to even kick people out of the store. So, you need to first set out who is authorized to sign for certain documents that pertains to your company. But, if you assume the normal case that it is a small or close corporation with one or two or three people, all of them might have the ability to sign. When you do, you would not sign as yourself but you would sign as a director or officer of the corporation. For instance, you might say I will sign this on behalf of Renthenthal Corporation as Chas Renthenthal, its president, and that is how a signature would look on a typical agreement.
What is a "fiduciary duty" to a corporation?
The "fiduciary duty" is that duty that directors owe to the corporation. The word "fiduciary" sounds all impressive, but what it really means is that you owe a duty to think of the corporation and not just of yourself. The corporation is an entity, and as an officer or director, especially as a director of that corporation, you owe that corporation a fiduciary duty; you owe it the duty that you won't for instance take a corporate opportunity yourself; as your own. So, say I'm in a corporation with few other people. I'm a director of that corporation and I know that the corporation is looking to lease some property for new offices, and I know exactly what the corporation needs; I know just how many parking spaces it will need, I know just how much space it's going to need. If I see that there's a building for sale close by, and it's exactly what I want, if I want to buy that building on my own and then lease it at a very high rate to the company, then that wouldn't be within my fiduciary duties. If I did that, the other directors and even shareholders can sue me to say that I've breached my fiduciary duties. So, what you really don't want to do is usurp - that's the big word here, the legal word - a corporate opportunity as your own. That's one of the fiduciary duties that you own. The other one is that you own a duty to shareholders to maximise their profits so you don't want to do anything that's so outside of the business that could jeopardise the business. Now, when the board of directors is being looked at and scrutinised by a court in a case they get pretty wide berth. There's a rule called the business judgement rule, and that is that the courts do not take a look back and say you've made a bad investment. They take a look and say: at the time when you made the investment did you at least use good business judgement? If you did, most of the time you are going to pass scrutiny and you will be found liable. However, if it looks like you did it for your own side dealing or you just did it because you didn't even give it any thought and you didn't care, then many times you will be found to have breached the fiduciary duty.
What is the role of President in a corporation?
Every corporation has shareholders, directors and officers. The president is an officer of the corporation. Typically, officers of the corporation will include presidents, treasurers, secretaries; Some states call the secretary a clerk, some call a treasurer a CFO, sometimes you can be a CEO. There's different ones, depending on the state.But if we just go with the common president, secretary and treasurer, the president is typically seen as the individual who is running the operations of the company. So they're responsible for operations. They're responsible for producing, for keeping track of the product, the expenses going in and out, just overall running the business.Where as, if you contrast that with like a CEO, typically CEO is Chief Executive Officers, they're looked at more as kind of big picture. They're not talking about the nitty-gritty of operating the actual business, but more about "Where should this business be going, or are we going in the right way or do we have the right business plan for it?"
What is the role of Treasurer in a corporation?
The Treasurer typically, or traditionally, would be the person who would take care of the funds. They are like the Chief Financial Officer -- or at least initially the Chief Financial Officer -- of the company. The treasurer is the individual that minds the "kitty". They make sure to take a look at the bank account, balance the checkbook, those types of things. Now, in modern times the role of Treasurer can be usurped by a real CFO or a Controller or an accountant, and the title of Treasurer as an officer that's required to be listed is not necessarily meaning the person who is going to be doing those exact things. For instance, if there were three individuals who started the company, and one was President, one was Treasurer, and the other one was going to be the Secretary, they still might have an outside accountant do their books even though someone is named as the Treasurer. So it's not always that you have to do that, but someone typically has to be named as those initial officers of the company.
What is a role of Secretary in a corporation?
Traditionally the Secretary role, and in some states they call it the clerk, is the maintenance of corporate records. Anything from making the minutes and keeping and recording the minutes of board of directors and shareholder meetings to managing the company's stock records, option plans, things like that. They can make sure that all that kind of stuff is kind of taken care of. So as the Secretary, they don't really do secretarial duties. But, in the common parlance, or what the old parlance was with corporations, they were the person that did those types of duties. Currently, someone just needs to be named secretary, and anyone can be named as a secretary without doing those duties, but most states want you to name someone as a secretary or as a clerk.
What is stock "par value"?
Par value is a nominal value that is given to shares of a corporation when it is first formed. The par value can be used for different things. Typically it is used to set this nominal price or maybe what's viewed as a minimal price for shares. Par value can also be used to determine franchise taxes in some states. Some states don't even require a par value and generally when a state doesn't require a par value, I tell my clients to not use a par value. When it does require a par value you can usually use a penny a share or excuse me a tenth of a penny a share, in other words .1, and those are pretty good numbers to start out with. Now, after a while when you actually start making money and your company starts having value, it's valuation will detemrine how much its per share price is which is very different than par value. Par value is really a placeholder.
What are the relative roles of Shareholders, Directors and Officers?
I like to think of a corporation as a bit of a pyramid, in this case. Shareholders are the owners; they are people who have an ownership stake, who have shares and equity in the company. They own shares; that's what makes them Shareholders. Some people call them stock holders, but it's the same thing. Shareholders, at their meetings, will elect Directors of the company. The Directors or the people who sit on the board of Directors are the individuals that really steer the governance of the company. In other words, they steer the direction of the company as to where it's going to go and what type of business it should be in; the very big overarching decisions of where the corporation is and what it is. Then Directors at their meetings, be they annual, quarterly, or special, will then in turn elect the Officers of the company. Those Officers could be presidents, vice presidents, CEOs, treasurers, or secretaries. Typically in the common parlance of corporate talk, the board always has to elect at least three Officers. Someone has to be president, someone has to be treasurer, and someone has to be the secretary or the clerk. It's really funny because in many corporations when there's only one person, all three officers are the same person; there's one Shareholder, one board member, and one Officer who does three different Officers' jobs. So, in the common way that we do and view corporations now it's not always that cut and dry that that person does all of those duties. The further step down is that those Officers are typically in charge of hiring employees that do most of the day to day work, in a much larger corporation. So, I look at it as a big ship, and I'm a former NAVY guy, so it makes it easy for me. The U.S. Navy owns a ship; the U.S. Navy is the Shareholder, and the ship is the corporation. Then, there's probably some big admiral somewhere that says where the ship should be going and he/she is saying "You need to be going this way or that way". That's like the Directors. Then you have the people on the ship who are actually making it happen, and those are the Officers and the employees. So, if they all work together the ship stays afloat, it goes to the right spot, and then the Shareholder makes a whole bunch of money. That's what everyone wants, isn't it?
