What do you associate most with the start of a new year? I personally think of resolutions and how the gym gets crowded with all those who resolve to get in shape. So for many, the New Year is about a new start, a chance to set goals, and a chance to catch up on everything that has been neglected in the old year. For the busy business owner, the start of the year is a great time to “resolve” to get their corporate resolutions “in shape.”
But what is a corporate resolution? A corporate resolution is a formal document that approves a company action. Despite the name “corporate resolution,” the term applies to limited liability companies too. For example, if you and your business partner decide to appoint John Smith as the new Manager, there needs to be a written record showing that the requisite number of shareholders voted to approve the appointment, and that the action is consistent with your bylaws. A sale of assets or a purchase of real estate must also be memorialized. Indeed, lenders and title companies often require a resolution to finalize a transaction, as evidence that the particular party to the transaction has the necessary authority to close. Bylaws generally provide for decisions through meetings or by written consent in lieu of meeting. In either case, an actual written corporate resolution that evidences the decision is a must. As my law school business enterprises professor always said: “If it isn’t in writing, then it did not happen.” Corporate resolutions are that “writing” to prove the the business action in question “did happen.”
Some common corporate actions that should be memorialized through a resolution include, but are not limited to, the following:
- Occurrence of an annual meeting.
- Appointment or removal of an officer, such as president, vice-president, or treasurer, including the terms of employment.
- Issuance of new shares or membership interests.
- Changes to the Board of Directors and any compensation packages for said Board members.
- Calls for capital contribution.
- Retention of a business attorney, accountant, or other third party professional.
- Approval of any amendments to the bylaws.
- Becoming a party to any real estate lease or equipment lease.
Corporate resolutions are an essential part of good business governance and best practices. A well-organized and up-to-date corporate book has many benefits — for example, when you finally sell your business. Or if a lender wants to see your corporate book before they approve the new line of credit or loan. Additionally, whether an entity adheres to formal corporate practices is one of the factors the courts consider when deciding whether to pierce the corporate veil. Yet many business owners – especially busy up-and-coming entrepreneurs – neglect this relatively simple but critical task.
Finally, what about single-member LLCs or solo corporations? Do they still have to keep written records of their business decisions? YES. Corporate resolutions (as well as other formalities) are equally as important when you wear the many hats of the owner, manager, and sole employee of your business. Indeed, they may be more important in the single-owner context because it not practical to hold a “shareholders meeting” with yourself or record meeting minutes with one person.