Keeping Your Corporation Healthy: Why Not Avoid Your Next Legal Review

My mother always tells me that I should visit the dentist every six months, but what do I do? I forget my appointments, avoid reminder calls, and end up in the dentist’s reclining chair maybe twice a decade. And once in the chair everything is downhill. The doctor points to cavities and receding gums from left to right, repeatedly telling me that these problems could have been avoided with preventive measures and regular office visits.

Don’t let my poor dental health reflect the legal health of your corporation. Often the officers of a corporation will avoid legal help at all costs, until it is too late. Then they miss filing dates, collect fines and late fees, and have a corporation that looks as disorganized and run-down as a row of rotten teeth.

So how can you avoid this scenario? You can stay away from a disorganized and penalized corporation by undergoing regular legal reviews. Basically, this means having your records examined by an experienced corporate attorney. But if this is still as distressing to you as having your teeth pulled, you can simply follow the steps below to do a DIY checkup on the health of your corporation.

1. Organize

Gather and organize your corporation’s articles of incorporation, bylaws, incorporator shares, meeting minutes, national corporation statement, shareholder register, and securities filings. Do you have all these documents? If the answer is “no”, then the do-it-yourself checkup is probably not right for your corporation. If the answer is “yes”, then good for you and move on. These documents must be kept organized throughout the year as shareholders have the right to consult these documents at any time. Think of it like flossing: it’s a hassle to do it every day, but the benefits are great.

2. Review each section carefully

Just like brushing your teeth, you should go through each section of your documents carefully and slowly. Rushing through your do-it-yourself checkup means missed diagnoses. Start with your articles of incorporation and work your way up to securities filings.

Articles of Incorporation:

Every corporation is formed when the articles of incorporation are filed by the Secretary of State. Once filed, a certified copy is returned to the corporation. This certified copy should have a front page position in your log book as it is the most important document in your records. Amendments to articles should also be included here.

statutes:

Employees should refer to their corporation’s bylaws frequently, so they are next in their record book. Because the bylaws are the laws that govern the conduct of your corporation, employees and shareholders often look here for information on directors, officers, elections, and meetings.

The statutes section of your records is the first place you might come across unhealthy legal status. Many corporations ignore the California law that limits the number of corporate directors. This is a complicated law that has many exceptions. For example, if the corporation has one shareholder, it may have one or two directors. But, if the corporation has two shareholders, it can have two directors. Examine whether or not your number of shareholders has increased since incorporation. You may need to consult an attorney to amend your statutes.

Statement from the National Stock Corporation:

After you file your articles of incorporation, you have 90 days to file a national corporation return. If your corporation was formed after the year 2000, you must have biennial filing records (prior to 2000, filings must be filed annually). Keep records of these filings, as well as all returns amended due to changes in information. If you do not keep up with your filings, you will be charged a $250 fee and suspension of your corporation. This is one office visit you won’t want to forget!

Actions by incorporator(s):

After an incorporator files the articles of incorporation, it generally adopts the articles of incorporation and appoints the directors. This should be documented and placed before the meeting minutes in your record book.

Meeting minutes:

Well, ladies and gentlemen, this is where the health of your corporation generally deteriorates. Looking at your minute logs, are there big gaps in time like looking at a mouthful of missing teeth? It’s easy to not record the minutes of your meetings, or to waste those minutes in the hustle and bustle of a busy office. It’s also easy to forget your dental appointment. Neither of them is okay.

The meeting minutes should appear as an unbroken record. All business activities must be documented. The story should start with important actions taken by the directors regarding the incorporation. The beginning of your story should include:

1. Election of officers

2. Adoption of statutes

3. Appointment of a permanent agent to service the process

4. Approval of the share certificate model

5. Set office location

6. Statement of Intent to Qualify Actions for Treatment under IRS Code Section 1244

7. Adoption of employment contracts

8. Establish a banking relationship

The rest of your record must include each meeting, as described in the bylaws. Special care must be taken to properly document all important decisions, such as internal transactions and all meeting votes.

Shareholders Registry:

This is another section that can become legally interesting. All shareholders are entitled to a stock certificate and the corporation must keep records of issued certificates. Where this becomes a headache that could rival any toothache is that it is California law to keep up-to-date records of these certificates.

Each record must include the shareholder’s name, address, and the number and class of shares held. The most important thing to remember is that the number of shareholders must never exceed the amount authorized in the bylaws. If you notice this serious violation, then it is time you contact an experienced corporate law attorney.

Presentation of values:

The last thing that should be on your records to keep up with your legal health is your securities statements. A notice of transaction must be filed with the California Department of Corporations for each issue of stock. Therefore, there must be a section in your records that covers the issuance and transfer of shares as regulated by state and federal law. If your corporation has qualified for an exemption, the exemption notices go here. Don’t forget that, even for exemptions, you must file each time a share is issued.

***After securities filings, you must have all other documents related to your corporation’s stock, such as seller’s permits, DBAs, employer identification numbers, etc.

So now you have reached the end of your DIY checkup. How did you do it? Is your corporation in need of a major root canal treatment or is it shining like freshly brushed teeth? If you have anything less than a bright white smile, we’re here to help.

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