Often a client will ask us to set up a corporation so the benefits of such an entity can be utilized and the owners and other principals will be afforded protection of the “corporate veil.”
The initial procedures include such matters as: filing articles of incorporation, preparing and executing bylaws, preparing resolutions by directors, by meeting or consent, to elect officers, issue stock, make an S Election (if desired), ratify all other actions and obtain a taxpayer ID number. Thereafter, an annual report will be due at the Arizona Corporation Commission on the anniversary date of filing the Articles of Incorporation.
Is this all that is necessary to protect owners, officers and directors from an outside attempt to “pierce the protection of the corporate veil?” No! The new corporation should, in addition, be mindful of other relevant matters, including paying attention to holding annual corporate meetings.
Arizona Revised Statutes provide that “A corporation shall hold a meeting of shareholders annually….” Arizona Revised Statutes also discuss holding annual meetings of the board of directors, which are usually held immediately after shareholders’ meetings. A failure to hold annual meetings will not render any corporate action invalid, but a dearth of minutes in the corporate minute book will serve to add to the “rending” of the “corporate veil” by outside parties. This can open up liability for owners, directors and officers of the corporation. If a corporation’s shareholders and directors are not able to meet for annual meetings, there is a procedure to bypass the annual meeting (consents in lieu of annual minutes of meetings) and still have records to maintain in the corporate minute book. These consents are addressed in Arizona statutes.
In addition, having completed minutes is useful in the event of tax audits by taxing authorities or when required by banks.
Some of our corporate clients have been audited. Fortunately for most, their annual minutes were up to date. Unfortunately for others, it was necessary to reach back as far as 13 years to update annual minutes. This, of course, involved large legal fees.
If you are the owner of a corporation and you believe it should be reviewed to determine the status of annual shareholders’ and directors’ meetings, we would be happy to hear from you.