Category Archives: Board of Directors

Corporate Formalities: do I need a resolution for that?

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I found this question on one of the community boards that I watch.
 

I have a newly formed corporation. I’m putting everything together for our first meeting, and I have found several examples of resolutions to adopt for the issuance of stock. Do I also have to have a separate resolution to create the shares?

Yes, in Pennsylvania, you will need a resolution to issue shares. A corporation is a separate entity. In order for it to act or “do” anything, its shareholders, officers, or directors must execute a resolution. A resolution is a document that memorializes the outcome of your shareholders‘, officers’ or directors’ votes. For example, before a corporation can issue shares, its shareholders must vote and agree to issue shares. If the shareholders vote in favor of issuing shares, then the secretary drafts the resolution, and the voting shareholders sign it.

In Pennsylvania, the directors can agree to waive a meeting and vote by paper, in an informal manner. So every resolution does not require a meeting. In addition, Pennsylvania law does not require an in-person meeting; the law also permit’s shareholders, officers, and directors to meet by telephone. As you can guess, if the directors agree to waive a meeting or meet by telephone, then this agreement must be memorialized by resolution.

Your first incorporation meeting will cover many issues:

  • -adopting your pre-incorporation activities
  • -adopting the by-laws
  • -adopting your office lease
  • -appointing officers
  • -adopting your shareholder agreement
  • -empowering the officers to elect s-corporation status for tax reporting;

These are only a few of the issues that you will discuss and vote on during your first meeting.

After your resolutions are executed, store them in your business minute book, where you store your by-laws and articles of incorporation. These documents are the only proof that your corporation is a legal entity and is a shield protecting you from personal liability.

Do you have a legal question? Send your question to us at http://wp.me/PN9wo-gz 

Good luck.

Sharmil McKee | Business Attorney | Philadelphia

Why do we need a conflict of interest policy?

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The IRS explains, in simple terms, the purpose of a conflict of interest policy:

Charitable organizations are frequently subject to intense public scrutiny, especially where they appear to have inappropriately benefited their officers, directors, or trustees. The IRS also has an oversight role with respect to charitable organizations. An important part of this oversight is providing organizations with strategies that will help avoid the appearance or actuality of private benefit to individuals who are in a position of substantial authority. The recommended conflict of interest policy is a strategy we encourage organizations to adopt as a means to establish procedures that will offer protection against charges of impropriety involving officers, directors, or trustees.

A conflict of interest occurs where individuals’ obligation to further the organization’s charitable purposes is at odds with their own financial interests. For example, a conflict of interest would occur where an officer, director, or trustee votes on a contract between the organization and a business that is owned by the officer, director or trustee. Conflicts of interest frequently arise when setting compensation or benefits for officers, directors, or trustees. A conflict of interest policy is intended to help ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts concerning the situation. A conflict of interest policy is also intended to establish procedures under which individuals who have a conflict of interest will be excused from voting on such matters.

Apart from any appearance of impropriety, organizations will lose their tax-exempt status unless they operate in a manner consistent with their charitable purposes. Serving private interests more than insubstantially is inconsistent with accomplishing charitable purposes. For example, paying an individual who is in a position of substantial authority excessive compensation serves a private interest. Providing facilities, goods, or services to an individual who is in a position of substantial authority also serves a private interest unless the benefits are part of a reasonable compensation arrangement or they are available to the public on equal terms and conditions.

How to Maintain Your Corporate Formalities

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This article highlights certain issues relating to your business’ operation that are important in maintaining limited personal liability and all tax benefits of doing business in the corporate form.

1. Benefits of Corporate Form
The limited liability and tax benefits of doing business in the corporate form result from the corporation’s being treated as a separate entity. To obtain these benefits, it is important that the corporation be operated as an entity separate from its shareholders, directors, and officers. In order to do this, you must understand the role of each of the persons involved in the operation of the corporation and must comply with certain formalities in operating the corporation.

2. Separate Entity
It is critical that you recognize the corporation as a separate entity and treat it as such. Under no circumstances should corporate and personal funds, assets, or accounts be mixed. Corporate funds should not be used to pay personal expenses, to make personal investments, or for any other purposes not related to the corporation’s business. Corporate assets should be distributed to shareholders only in the form of compensation, dividends, or other distributions specifically approved in advance by the board of directors.

The corporation should also be held out to third parties as a separate entity. All business of the corporation should be conducted in the name of the corporation, and the name of the corporation should be used on all agreements, contracts, leases, orders, and other arrangements entered into by the corporation. It should also be used on all products, signs, advertisements, correspondence, business cards, telephone directory listings, and similar items. The corporation should carry its own insurance and will be required to file its own income and employment tax returns.

The corporation can only act through individuals. However, when acting for the corporation, remember that you are acting as a representative of the corporation, and not in your individual capacity. When signing documents, make it clear that you are representing the corporation. For example, all documents signed on behalf of the corporation by its president should be signed, “[Business Name] by [Your Name], President.” If you fail to make your representative capacity clear, you run the risk of incurring personal liability for the obligations of the corporation.

3. Individual Roles
The shareholders, directors, and officers of the corporation all have their own roles and functions. It is important that these roles be kept separate and respected. This is particularly crucial in the case of a closely held corporation such as yours where the same individuals function in several different capacities.

a. Shareholders
The shareholders own the corporation. However, the shareholders are not partners in a partnership, and they neither own the business (which is owned by the corporation) nor manage the business (which is the function of the board of directors and officers). The shareholders own stock in the corporation and have a voice in the management of the corporation since they elect the directors of the corporation and participate in certain major decisions, such as sale of substantially all of the assets of the corporation and amendment of its articles of incorporation. If the corporation’s existence is to be respected, it is important that the shareholders’ activities are limited to their proper role.

The shareholders must act as a group. Actions are taken at meetings, or by written consents signed by all shareholders, through the adoption of formal resolutions. A formal written record of all actions taken by the shareholders should be maintained in the corporation’s minute book. Shareholder meetings should be held at least once a year for the purpose of electing directors. Special meetings may be required if additional matters requiring shareholder approval arise.

b. Directors
The board of directors of the corporation is responsible for the management of the corporation. The board of directors establishes policy, which is carried out on a day‐to‐day basis by the officers of the corporation. The board of directors elects, and can remove, the officers. The board of directors also makes all major decisions relating to the management of the corporation, including the compensation paid to employees, issuance of stock, approval of important contracts, borrowing of money, purchase of equipment and property, and the payment of dividends.

The board of directors must act as a group. Actions are taken at meetings, or by written consents signed by all directors, through the adoption of formal resolutions. A written record of all actions of the board of directors should be maintained in the corporation’s minute book.  The board of directors should meet at least once a year for the purpose of electing officers and dealing with such things as the compensation of shareholder‐employees. However, special meetings may be required from time to time throughout the year as major issues arise that require the attention of the board of directors.

c. Officers
The officers are employees of the corporation and are responsible for conducting the day‐to‐daybusiness activities of the corporation. The business is to be conducted in accordance with policies established by the board of directors, and authorization must be obtained from the board of directors for major corporate transactions. The scope of authority and the functions and responsibilities of the various officers are set forth in the bylaws of the corporation.

4. Corporate Formalities
Because a corporation is a separate entity in which individuals may play a variety of roles, certain formalities are prescribed for corporate actions. Complying with these formalities is important to have the corporation recognized as a separate entity and to avoid personal liability for the obligations and liabilities of the corporation. The bylaws of the corporation provide a guide to compliance with proper corporate formalities. In addition, proper and complete records must be maintained by the corporation. Every year, your  company should record minutes and execute resolutions adopting any significant action. Please call me if you have any questions. *Warning–shameless plug* We offer a program to our clients to help with this requirement.  It is called the General Counsel Program, and includes an annual service to address these yearly requirements.

5. Further Advice
You should seek further legal advice before undertaking major corporate changes or transactions. The corporation’s bylaws provide you with a guide to routine corporate operations, but additional guidance will be required to comply with the legal requirements for major matters.

You should, for example, consult an attorney, if you are considering any of the
following:

  • Doing business in a new state
  • Issuing new stock or issuing bonds or other debt instruments to investors.
  • Selling or otherwise transferring a majority of the corporation’s assets.
  • Merging into any other corporation, or having any other corporation merge into the
    corporation.
  • Having the corporation acquire stock from any stockholder.
  • Amending the articles of incorporation of the corporation.
  • Dissolving the corporation.
  • Selling the Corporation’s shares to the public.

Do you have questions about your corporate formalities? We offer free consultations.  Contact us today.

Sharmil McKee | Business Attorney | blog@mckeeoffice.com

All in the Family Business: Can the President do that?

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I received this legal question by email:


We own a family business, an 

S corp. Two brothers are equal share holders. We have a Board of Directors with three directors. We have three officers; One of the officers is also a 50% shareholder. The Wife of the Pres. who holds no office was printing financial reports and taking them home where the 2 of them would discuss them. She did not stop, so we limited her computer access to no report viewing. We are 2 members of the Board of directors, the VP who has 50% of shares, and the Sec/Trea. Do we have the authority to over ride the Pres, who is also a 50% shareholder? We met as a Board and voted 2 for the restriction to continue and 1 against it. He says that since he is the Pres. we are not allowed to do anything he doesn’t agree with. Is that true? How should we proceed?
 

This is how I responded:


What do your company’s by-laws say about voting?  You have two classes of votes–shareholders and directors. Shareholders and Directors are completely different; they have  different roles within a corporation.  Generally the shareholders only vote on major events, such as selecting the board of directors, whether to file bankruptcy and whether to dissolve the business.  The Board of Directors, generally, votes on day-to-day issues, such as whether to lease a new building or whether to file the taxes as an S-corporation.  Under the Pennsylvania Code, each director has one vote.  However, your by-laws may have a different voting structure. 

If I assume that your corporation does not have by-laws or the by-laws do not discuss voting, then your corporation is governed by the Pennsylvania Corporation Code.  Under the Code, each director has one vote.  To authorize a business transaction, majority of your directors must be present at the meeting, and majority of the present directors must vote in favor of the transaction. 

You may notice that I did not list officers as a class of voters.  Unless your by-laws or resolutions provide otherwise, officers do not have voting rights.  The Pennsylvania Corporation Code does not give officers any voting rights.  Officers are the President, Secretary, and Treasurer, (any other position your directors choose to create).  Officers only do what the Directors instruct them to do.  They do not have more powers than the Directors.

 

So I recommend the following:
First, read your by-laws. It should answer your question about whether the President has a super-majority vote.


Second, if your shareholders never adopted by-laws, then read the Pennsylvania Corporation Code. Based on the information you provided, the board legally voted to continue the restriction of viewing financial reports.   Hopefully, the Secretary recorded the minutes, and the resolution was written, adopted, and signed.  The President, as an officer, is bound by the resolutions passed by the board.


As a side note, the President is also a shareholder. He can call a special share-holder meeting.  The shareholders may decide to appoint new board members. 

 

Rest assured, your situation is common among small, closely-held corporation.   It is something my office sees often, because most of our clients are small, closely-held corporation.  Under these circumstances, putting the law aside for a moment, I recommend a negotiation and brainstorming session.  Clearly, the President is unhappy with the way he is getting the financial information.  On the other hand, you are concerned about financial decisions being made without the board’s involvement.  Perhaps, you can compromise and meet in the middle.  There are thousands of solutions; your board just needs to find the solution that fits.
 

 

Sharmil McKee
Business Lawyer
 
McKee Law Office
245 W. Allens Lane
Philadelphia, Pa 19119
215-242-5260 (office)
1-877-273-0749 (toll-free)
Skype Us! (mckee.law.offices)
http://www.mckeeoffice.com

Can family members serve together on the same board of directors of a church?

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Can family members serve together on the same board of directors of a church?

I received the following questions by email:

Can family members serve together on the same board of directors of a church?


This is my answer:


Absolutely, in fact, it is probably practical given that most families share the same values, including religious faith and community-involvement.  I am going to assume that the underlying question you are asking is whether ‘allowing family members to serve on the church’s board, exposes the church to additional liabilities’.  The short answer to that question is ‘yes’.  

A church member could always sue the church claiming a board member breached his/her fiduciary duty* to the organization.   Family members tend to place family interests before other obligations.  On the other hand, your church can easily avoid this claim, by implementing a “Conflict of Interest Policy”.  


What is a Conflict of Interest and why does it matter?  A conflict of interest presents itself when your interests are directly opposite to the church’s interest.  For example, let’s imagine you and your sister serve on the church’s board.  Your sister owns a cleaning service.  The church needs to hire a cleaning service and your sister is bidding for the job.   However, your sister’s prices are twice as much as the average cleaning service.  But your sister claims her service is also twice as good as the average cleaning service.  In this example, your sister’s interests are directly opposite to the church’s interest.  Your sister wants the highest price for her business, but the church wants t pay the least for the service.  If the church votes to award the job to your sister, then it could “look like” she took advantage of her board position to get the job.  In addition, it could “look like” you voted to award the job to your sister because you are family-members, not that it is the best for the church. 

Conflicts of interests create ground for lawsuits from the organization’s members. On the other hand, a conflict of interest policy would dictate the steps an organization would follow when a board member presented a conflict of interest—such as when a sister wants the church to hire her cleaning service.   By following these steps precisely (and documenting the steps) the board could award the job to your sister AND avoid claims of breach of fiduciary duty.


*Breach of fiduciary duty is when a person breaks her promise to make the best possible decision to benefit an organization or person.

 

 

 

Sharmil McKee
Business Lawyer
 
McKee Law Office
245 W. Allens Lane
Philadelphia, Pa 19119
215-242-5260 (office)
1-877-273-0749 (toll-free)
Skype Us! (mckee.law.offices)
http://www.mckeeoffice.com

 

Does an LLC need officers?

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A business owner asked this legal question by email:

 Does an LLC need officers?

Yes.  An LLC is an Limited Liability Company.  An LLC that is doing business in Pennsylvania must be registered with the Department of State.  Pennsylvania requires all businesses to register a President, Secretary, and Treasurer.  The good news is that one person can hold all positions.

Annual Boardroom Guide to Litigation in the 50 States

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In a recent study by the American Justice Partnership, Pennsylvania ranked 48 out of 50 states as providing the worst legal climate for tort liability. The study states that PA is tort-friendly and change is NOT on the horizon. In short, the study argues that Pennsylvania’s current liability laws stifle business growth and job creation. Whether you agree with the study’s analysis or not, it does make a very sound conclusion–if you are a business owner in Pennsylvania, you should budget now for the real possibility that your company will be sued. And remember even defending your company in a lawsuit costs money and time.