Financing Your Small Business

Corporate Records

State corporate statutes allow shareholders access to corporate records unless there is a justifiable reason not to do so. Therefore, it is advisable to keep ade­quate books and records, including your bylaws, minutes, shareholder ledger, licenses, permits, and copies of significant contracts, in a centralized location.

QUICK Tip

Obtain a Corporate Book to Organize Your Records: This is a three-ring binder with tabs for organizing your articles of incorporation and any amendments, your bylaws and any amendments, your shareholder and director meeting min­utes, your share certificates and shareholder ledger, and a tab for forms, licenses, and permits.

An accurate record of the shareholders of the corporation should include the name and address of each shareholder and number of shares held. You should also keep track of the date he or she became a shareholder and the certificate number he or she was issued.

Keep your corporate seal in your corporate book. This is the seal that you will use to emboss all corporate records. The seal should state the name of the company, as well as the state and year of incorporation. Keep your corporate book in a safe place, usually under the care of the secretary of the company.

Bylaws

The bylaws are the governing document of a corporation that set forth the duties and responsibilities of the officers and directors. They also establish orderly procedures for conducting business. The bylaws are con­sidered to be a contract among the shareholders, directors, and officers, and typically contain the provisions regarding shareholders' rights, direc­tors' duties, and the affairs of the corporation. (A sample set of bylaws is included in Appendix B.)

The bylaws should specify the necessity of holding annual meetings of the shareholders and directors, and detail the procedures for notifying these individuals of these meetings. The bylaws will also define what constitutes a voting majority and a quorum for the purposes of the corporation. The procedures for calling special meetings are usually described, as well as the standard order of business of any meeting. The bylaws are also the place where the specific duties of the officers of the corporation are described.

While many of these terms could be otherwise stated in the articles of incorporation, it is usually easier to adopt them as bylaws. Since bylaws are initially adopted by the directors as their internal operating procedure, the directors may generally propose changes to the bylaws at any time. Most bylaws provide that the directors can amend the bylaws but the shareholders can override the directors' amendments. Neither the bylaws nor any amendments to them are filed with the secretary of state.

If a corporation functions without bylaws, the articles of incorporation and state corporation statutes will regulate the affairs of the corporation. Since amendments to the articles of incorporation are a more cumbersome and costly way to add governance provisions, it is advisable for a corpora­tion to adopt bylaws as a way of maintaining some flexibility in the func­tions of the corporation.

Officers and Directors

Policy decisions are made in a corporation by the board of directors and car­ried out by the officers. Directors create the policies of the corporation and officers implement those policies. Operational decisions are usually made by the officers. Directors generally delegate certain duties to the officers who are, in turn, answerable to the board of directors for their actions.

Directors are elected by the shareholders of the corporation, and officers are appointed by the directors. Therefore, the shareholders may remove a direc­tor and the directors may remove an officer.

Typically, an initial director is appointed in the articles of incorporation or appointed by the incorporator and then an initial board of directors is appointed at the initial meeting of the directors. It is prudent to designate an uneven number of directors so that the board is not ever stymied by a tied vote. Also, it is wise to stagger the terms of service of the directors so that elections of directors never result in a new, inexperienced board. This also helps maintain continuity.

The directors, in turn, appoint the officers of the corporation, who serve at the pleasure of the board unless they are given employment contracts that specify the terms under which they can be terminated. It may be unwise to place officers of the company on the board of directors, as this can thwart frank discussions and can alter the true, independent nature of the board.

C N

Figure 9.1: BOARD OF DIRECTOR'S POWERS

The board of directors is usually granted powers by state statute and through the bylaws of the company. Those powers will typically include the power to:

• select and remove all the officers, agents, and employees of the corpo­ration. This will include the power to:

♦ prescribe such powers and duties for the officers, agents, and employees not inconsistent with the law, the articles of incorporation, or the bylaws;

♦ fix compensation for the officers, agents, and employees; and,

♦ require security for faithful service from the officers, agents, and employees;

• conduct, manage, and control the affairs and business of the corporation;

• make sure that rules and regulations are not inconsistent with the law, the articles of incorporation, or the bylaws;

• change the principal office of the corporation from one location to another;

• designate any place for the holding of any shareholders' meeting or meetings;

• adopt, make, and use a corporate seal;

• prescribe the forms of certificates of stock;

• alter the form of the corporate seal and of certificates of stock from time to time, as in their judgment they may deem best, provided such seal and such certificates shall at all times comply with the provisions of law;

• authorize the issue of shares of stock of the corporation from time to time, upon such terms and for such consideration as may be lawful;

• borrow money and incur indebtedness for the purposes of the corpora­tion; and,

• cause to be executed and delivered therefore, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities.

V__________________________________ J

Duties of the President. The president shall have general supervi­sion, direction, and control of the business and officers of the corpora­tion. The president shall preside at all meetings of the shareholders, and in the absence of the chairman of the board (or if there is none), at all meetings of the board of directors. The president shall be ex officio a member of all the standing committees, including the executive com­mittee (if any), and shall have the general powers and duties of manage­ment usually vested in the office of president of a corporation. The pres­ident shall have such other powers and duties as may be prescribed by the board of directors or the bylaws.

Bifurcation of President and Chief Executive Officer. If the board of directors creates the office of chief executive officer as a separate office from president, the chief executive officer shall have the power and duty to act as the chief executive officer of the corporation. Subject to the control of the board of directors, the chief executive officer may also have

General supervision, direction, and control of the corporation and its busi­ness, affairs, property, officers, agents, and employees. If there is a chief exec­utive officer, the president shall be the chief operating officer of the corpo­ration with responsibility for the operation of the business of the corpora­tion in the ordinary course and shall be subject to the general supervision, direction, and control of the chief executive officer unless the board of directors provides otherwise. In case of the absence, disability, or death of the chief executive officer, if there is one, the president shall exercise all the powers and perform all the duties of the chief executive officer.

Duties of Vice President. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors, or if not ranked, the vice president designated by the board of directors, shall perform all the duties of the president. When so acting, the vice president shall have all the powers of, and be subject to all the restric­tions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws.

Duties of the Chief Financial Officer. The chief financial officer (who also may be called the treasurer) shall keep and maintain adequate and cor­rect accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name of the corporation with such depositories as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of direc­tors. The chief financial officer shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation.

Duties of Secretary. The secretary shall keep the minutes of the board of directors. The secretary shall also keep the minutes of the meetings of stockholders. He or she shall attend to the giving and serving of all notices of the company, shall have charge of the books and papers of the corpora­tion, and shall make such reports and perform such other duties as are inci­dental to their office and as the board of directors may direct. The secretary shall be responsible for supplying to the resident agent or principal office any and all amendments to the corporation's articles of incorporation and any and all amendments or changes to the bylaws of the corporation. The secretary will also maintain and supply to the resident agent or principal office a current statement setting forth the name of the custodian of the stock ledger, or duplicate stock ledger and the present and complete post office address, including street number, if any, where such stock ledger or duplicate stock ledger specified in the section is kept.

Required Meetings

Shareholders and directors are required to conduct annual meetings. The minutes of the meetings must be included within the corporate records. Most states allow the annual meetings to be held at a designated time and place, either within or without of the state's boundaries.

Minutes of Meetings

The minutes of a corporation's meetings should provide the complete record of corporate actions by the board of directors and document the legitimate exercise of responsible corporate governance by the directors. In small corporations, it is too easy to make important decisions during the day over the telephone, during coffee breaks, or on the golf course. All major decisions should be made by the board of directors and included in written minutes.

QUICK Tip

Rule No. 1: Put it in writing should be the adage for a corporation to live by.

Even if you feel that you are too busy managing the corporation to attend to the detail of the corporate minutes, you need to realize that accurate, written reports of your corporate proceedings may be your only defense if the corporation runs into trouble. Without accurate minutes, a judge or the IRS may disavow many of the corporation's actions, including executive compensation and bonuses, retirement plans, and dividend disbursements.

The minutes of any meeting should show that the meeting was properly called and that everyone there received adequate notice as required by the corporate bylaws. If a written notice of the meeting was sent out, a copy should be included. If no notice was given, the appropriate waiver of notice should accompany the minutes. The minutes should be signed by all attending, indicating agreement that the minutes accurately reflect what took place in the meeting.

For every action that is taken during a meeting, the minutes should show that the matter was properly introduced, seconded, discussed, and agreed to by a voting majority as defined in the bylaws. The complete text of any resolution, contract, report, or other document adopted or ratified in a meeting should also appear in the minutes.

There is no standard format for minutes, but items such as the time, date, and place of the meeting, along with a list of all attending, should be included. All actions by the board of directors should be recorded. Although minutes should be specific, they need not record every word of debate on every subject. They should concentrate on final decisions rather than discussion.

Shareholder Meetings

State corporation statutes require that a corporation hold at least one shareholder meeting per year. This is called an annual meeting. Meetings that are held between annual meetings are called special meetings. Special meetings may be required to vote on an impending merger or amendment to the articles that cannot wait for the annual meeting and the like. Any business requiring shareholder approval may be addressed at any shareholders' meeting.

The main topic of business at an annual meeting of shareholders is the election of directors to serve for the upcoming year. In addition, share­holders should adopt a resolution endorsing actions taken by the board of directors during the past year. All resolutions adopted by the share­holders should be recorded in the minutes, along with other documents that relate to the resolution.

Most state corporation statutes also allow shareholders to adopt resolu­tions without a meeting. Actions taken by shareholders without a meeting

Must be authorized in writing by shareholders holding a majority of the vot­ing power and filed in the corporate minute book.

Shareholders may attend the meeting in person or vote by proxy. In most corporations, shareholders vote based on one vote per one share of common stock. Generally, common stock is voting stock and preferred stock does not vote. Certain classes of preferred stock may have voting rights for desig­nated purposes. A proxy is an authorization to another person, usually the president or chairman of the board, to vote your stock in a particular man­ner. Proxies are normally given in those cases in which a shareholder cannot attend an annual or special meeting. Proxies can be revoked at any time by a shareholder. For example, a shareholder could appear at a meeting, revoke his or her proxy, and vote his or her own shares.

The bylaws may prescribe the time for the annual meeting or allow the board to set it. A written notice of the meeting should be sent to all eligible shareholders within the period required by the bylaws. The notice of the meeting should be accompanied by a proxy statement explaining the mat­ters to be voted on and provide sufficient information to allow a share­holder to make an informed choice. Private companies are not required to file their proxy statements with federal or state regulators.

Steps to Take Before an Annual Shareholder Meeting

To ensure all of the legal requirements are met for the annual shareholder meeting, several things must be done prior to the meeting date.

Send the Annual Report to the Shareholders. In a small com­pany, this may simply be financial statements that detail the profits and losses (income statement), and assets and liabilities (balance sheet) of the corporation. The accuracy of all financial documents should be attested to by either the treasurer or company accountant. This step may not be required for a small company that has no shareholders outside of the fam­ily, but it is always a good idea to provide this information annually to the shareholders anyway. (It also keeps the family happy and lets them know that you are not squandering the family inheritance.)

Update the List of Shareholders. If there have been any changes or transfers of stock, make sure the corporate books reflect the current share­holders. When there are many shareholders, this list is required to verify voting eligibility of those attending the meetings. The secretary usually greets the shareholders at the meeting and confirms they are eligible to vote and attend the meeting.

Notify Shareholders. Shareholders must be notified in writing of any meetings—typically no less than ten days or more than sixty days before the meeting is held. This notification must include the purpose for the meeting, as well as the time and place where it is to be held.

Issue a Proxy Statement. When the notifications are sent out, it is a good idea to include proxy statements that will allow shareholders who cannot attend the meeting to participate by designating someone else to cast their votes for them. The proxy statement should explain the matters to be voted upon and provide sufficient information to allow a shareholder to make an informed choice.

Have an Agenda. Regardless of the number of items to be discussed and the number of shareholders or directors of the corporation, it is a good idea to put an agenda together. An agenda informs everyone involved of the topics of discussion for the meeting and keeps the meeting on purpose.

Appoint a Chairperson for the Meeting. The president usually acts as the chairperson at all meetings of the shareholders, and in the absence of the chairman of the board (or if there is none), at all meetings of the board of directors. You should also appoint a parliamentarian at all meetings. Someone who is familiar with parliamentary procedure and can be called upon if a question arises about how the meeting is being con-

Ducted or the proper requirements for ratifying a corporate decision. The secretary of the company sometimes fills this role.

Prepare Yourself to Answer Questions. Small corporations will usually be able to anticipate controversial topics, but larger corporations can be blindsided by shareholders who may be unknown to any of the officers and directors. When a large number of shareholders are antici­pated to be present at the meeting, it is a good idea to arrange for your attorneys and accountants to be at the meeting with any documentation they may need to consult for reference. This material is likely to include all corporate records, contracts, leases, and tax data.

Figure 9.2: SAMPLE SCRIPT FOR THE ANNUAL MEETING OF SHAREHOLDERS

A sample script for the annual meeting of shareholders is shown below. After this formal business agenda is completed, the company should make its informational presentation.

ABC, INC.

AGENDA FOR ANNUAL MEETING OF SHAREHOLDERS February 14, 2007 10:00 A. M.

Will the meeting please come to order. I am Bob Anderson, Chairperson of the Board of ABC, Inc. On behalf of the Corporation, I welcome you to this annual meeting of Shareholders. We appreciate your continued interest in the Corporation, as shown by your attendance here today. Before proceeding with the business of the meeting, I will introduce the other members of your board of directors and the officers who are here today:

Bob Anderson, the CEO of the Company, Chairperson of the Board of Directors,

Brad Anderson, the Secretary of the Company, mem­ber of the Board of Directors,

John Jones, the Vice President of the Company, mem­ber of the Board of Directors, and

Jim Smith, the Treasurer or CFO of the Company and member of the Board of Directors.

The Secretary has a complete list of the issued and outstanding common shares as of the close of busi­ness on December 31, 2006, the record date of this meeting. Will the Secretary please report the num­ber of shares outstanding and entitled to vote at this meeting?

As of the close of business of December 31, 2006, the Corporation had 5,300,000 shares of common stock issued and outstanding and entitled to vote.

The Secretary has in his possession, and there will be filed with the records of the Corporation relating to this meeting, an affidavit of mailing certifying to the mailing on January 14, 2007 to the Shareholders of record at the close of business on December 31, 2006 of the annual report for the fis­cal year ended December 31, 2006, the notice of annual meeting and the form of proxy. It appears from this affidavit and the attached exhibits that notice of this meeting has been duly given as required by law and the Corporation's bylaws.

Brad Anderson and Jim Smith are appointed as Election Judges. If there are any persons present who have not indicated their appearance with the Election Judges, will they please do so now. All per­sons acting as proxies should present those proxies to the Election Judges. Mr. Secretary, will you please state whether a quorum is present at this meeting and, at a later point, please report the total number of shares so represented.

The Election Judges have reported that a quorum is present in person or by proxy.

Before opening the meeting to questions, I would like to proceed with the necessary business of the meeting.

Mr. Secretary, will you please report the total num­ber of shares represented at this meeting.

The total number of shares represented at this meet­ing is 5,140,000 shares of common stock.

As the next order of business, I ask that the Secretary present and read the notice of annual meeting and the proof of mailing thereof.

(Reads the Notice of Annual Meeting and the Affidavit of Mailing.)

Mr. Secretary, will you please file the documents with the minutes of the meeting?

Yes.

The next order of business is the approval of the Annual Report for the fiscal year ended December 31, 2006. Are there any questions regarding the annual report? (Pause) May I now have a motion to approve the fiscal year 2006 annual report?

I move that the Annual Report of this Corporation as of December 31, 2006, as mailed to all Shareholders of ABC, Inc., be and the same is hereby approved.

I second the motion.

I call for vote on the motion. Mr. Secretary, how do the Shareholders vote?

(Reads the Summary of Votes approving the Annual Report.)

The motion is carried and the Annual Report is hereby approved.

The next order of business is the election of five Directors of the Corporation to serve until their respective successors are duly elected and qualified.

I recognize Mr. Hoffman [1st Shareholder].

I nominate for election as Director the following persons:

Bob Anderson Brad Anderson John Jones Jim Smith Janice Doe

I second the nomination.

Are there any further nominations for Directors? (Pause)

If there are no further nominations, the nominations are closed. Is there any discussion? (Pause)

We are now ready to proceed with the vote on the nominations made at this meeting. Will the Election Judges please distribute the ballots, collect them after the vote and report the results to the Secretary?

(To any Shareholders present) If you have already given your proxy to management, you need not vote, since the persons designated as proxies will vote for you as indicated in the proxy. Please fill in the num­ber of shares being voted in the space provided for that purpose.

[Note for the Chairperson]: If anyone other than the management's nomi­nees are nominated, the Chairperson should state the following:

The ballot for the election of Directors has room for the insertion of the names of those persons other than the Directors who have been nominated by the management of the Corporation. You may insert the name of any one of the other nominees and cross out the name of any nominee for whom you do not want to vote.

Secretary The Election Judges have reported that the

Shareholders have voted as follows:

On the election of Directors, each of the five nomi­nees has received 5,140,000 votes.

(If anyone else has been nominated, it will be nec­essary to name each nominee and give the number of votes for that nominee.)

[Note for the Chairperson]: A majority of common stock greater than 2,650,000 (half of the 5,300,000 outstanding shares of common stock) shares are needed for any motions taken up at the meeting. Directors are elected by plurality.

Chairperson In view of this vote, I declare that Bob Anderson,

Brad Anderson, John Jones, Jim Smith and Janice Doe have been duly elected as Directors of the Corporation for the next year.

Is there any further business to be discussed or con­ducted at this meeting?

There being no further business to be discussed or conducted, I request a motion to declare the meeting at an end.

Shareholder I move that the meeting be closed.

Shareholder I second the motion.

Chairperson All those in favor, signify by saying yes. Those

Opposed, no.

I declare this meeting is adjourned.

Steps to Take After an Annual Shareholder Meeting

Once the meeting has been properly conducted, there are still a few follow up items that must be done.

Write and Distribute the Meeting's Minutes. File the minutes of the meeting with your corporate records. The minutes should contain accu­rate and specific records about all decisions made during the meeting, and should be attested to by those attending.

Follow Up on All Approved Actions. Some actions taken in a meeting, such as the adoption of an amendment to the articles of incor­poration, may not take effect until the documents are filed with the sec­retary of state.

Board of Director's Meetings

State corporation statutes require that a corporation hold at least one board of director's meeting per year. This is called an annual meeting. Meetings that are held between annual meetings are called special meet­ings. Any business requiring board of director approval may be addressed at any board meeting. The primary purpose of a board of directors meeting is to make the decisions that have been delegated to the directors by the shareholders, such as the election of officers to run the day-to-day oper­ations of the company.

It is not always convenient for the directors to get together for meetings. Most state corporate statutes allow for directors to meet by telephone, in which case, written minutes should accompany the decisions of the meet­ing and be signed at a later date or by fax. This provision should be added into the bylaws.

Most state corporate statues also allow corporations to adopt resolutions without a meeting by unanimous written consent signed by all directors. Unanimous written consent is a term used for a process that allows direc­tors or shareholders to act without a meeting if they each give their consent to specific corporate actions in writing. The consent must be unanimous for the resolutions to be properly adopted.

Resolutions

A resolution is a formal action of the directors (or in some cases, share­holders) authorizing a particular act, transaction, or officer appointment. Resolutions should be included as part of the minutes of the directors or shareholders meetings.

It is also wise to keep a catalog of resolutions that have been adopted by the board of directors and shareholders so that they can be retrieved quickly in the future. Keeping a cross-reference by the type of resolution and the date that it was made will help to maintain consistency in decision-making and enable the board to review prior actions quickly. It can become an arduous task to have to sort through all of the past minutes to determine a prior action by the board.

QUICK Tip

A Typical Form for Resolutions:

RESOLVED, that the Bylaws attached hereto as Exhibit A be, and they hereby are, adopted as the Bylaws of and for the Company; and

FURTHER RESOLVED, that the Secretary of the Company be, and he/she hereby is, authorized and directed to execute a Certificate of Secretary regarding the adoption of the Bylaws, to insert the Bylaws in the Company's Minute Book and to see that a copy of the Bylaws is kept at the Company's principal office, as required by law.

Initial Issuance of Stock

Founders' common stock should be issued by the corporation to the founders as soon after incorporation as possible and should be so stated in the minutes. If the founders of the company wait to issue their initial stock, you could incur unfavorable tax consequences. For example, if you failed to issue stock to yourself as founder and the company sells shares at a $1.00 per share, the stock you subsequently receive should be valued at $1.00 per share. You could have taxable income upon receipt unless you paid cash for the shares or trans­ferred property of equal value to the company in return for the shares.