Corporate Paperwork

The business arena in America operates on a daily assortment of legal forms. There are more legal forms in use in American business than are used in the operations and government of many foreign countries. The business corporation is not immune to this flood of legal forms. Indeed the operation of a corporation, in general, requires more legal documents than does any other form of business. While large corporations are able to obtain and pay expensive lawyers to deal with their legal problems and paperwork, most small businesses cannot afford such a course of action. The small business corporation must deal with a variety of legal documents, usually without the aid of an attorney.

Unfortunately, many businesspeople who are confronted with such forms do not under¬stand the legal ramifications of the use of them. They simply sign the forms with the expectation that it is a fairly standard document, without any unusual legal provisions. They trust that the details of the particular document will fall within what is generally accepted within the industry or trade. In most cases, this may be true. In many situations, however, it is not. Our court system is clogged with cases in which two businesses are battling over what was really intended by the incomprehensible legal language in a certain legal document.

Much of the confusion over corporate paperwork comes from two areas: First, there is a general lack of understanding among many in business regarding the framework of law; and second, many corporate documents are written in antiquated legal jargon that is difficult for even most lawyers to understand and nearly impossible for a lay person to comprehend.

The various legal documents that are used in this book are, however, written in plain English. Standard legal jargon, as used in most lawyer-prepared documents, is totally incomprehensible for most people. Despite the lofty arguments by attorneys regarding the need for such strained and difficult language, the vast majority of legalese is ab¬solutely unnecessary. As with any form of communication, clarity, simplicity, and readability should be the goal in legal documents.

Unfortunately, in some specific instances, certain obscure legal terms are the only words that accurately and precisely describe some things in certain legal contexts. In those few cases, the unfamiliar legal term will be defined when first used. Generally, however, simple terms are used throughout this book. In most cases, masculine and feminine terms have been eliminated and the generic “it” or “them” used instead. In the few situations in which this leads to awkward sentence construction, “his or her” or “he or she” may be used instead.

All of the legal documents contained in this book have been prepared in essentially the same manner by which attorneys create legal forms. Many people believe that lawyers compose each legal document that they prepare entirely from scratch. Nothing could be further from the truth. Invariably, lawyers begin their preparation of a legal document with a standardized legal form book. Every law library has multi-volume sets of these encyclopedic texts which contain blank forms for virtually every conceivable legal situation. Armed with these pre-prepared legal forms, lawyers, in many cases, simply fill in the blanks and have their secretaries retype the form for the client. Of course, the client is generally unaware of this process. As the lawyers begin to specialize in a certain area of legal expertise, they compile their own files containing such blank forms.

This site provides to those businesspersons who wish to form a corporation a set of legal forms that has been prepared with the problems and normal legal requirements of the small business corporation in mind. These forms are intended to be used in those situations that are clearly described by the specific language of each particular form. Of course, while most corporate document use will fall within the bounds of standard business practices, some legal circumstances will present non-standard situations. The forms in this site are designed to be readily adaptable to most usual business situations. They may be carefully altered to conform to the particular transaction that confronts your business. However, if you are faced with a complex or tangled business situation, the advice of a competent lawyer is highly recommended. If you wish, you may also create forms for certain standard situations for your corporation and have your lawyer check them for any local legal circumstances.

The proper and cautious use of the forms provided in this site will allow the typical corporation to save considerable money on legal costs over the course of the life of the business, while enabling the business to comply with legal and governmental reg¬ulations. Perhaps more importantly, these forms will provide a method by which the businessperson can avoid costly misunderstandings about what exactly was intended in a particular situation. By using the forms provided to clearly document the proceedings of everyday corporate operations, disputes over what was really meant can be avoided. This protection will allow the business to avoid many potential lawsuits and operate more efficiently in compliance with the law.

The Importance of Corporate Recordkeeping

The amount of paperwork and recordkeeping required by the use of the corporate form of business may often seem overwhelming. Sometimes, it may even seem senseless. However, there are some very important reasons why detailed records of corporate operations are necessary. A corporation is a fiction. It is a creation of the government to enable businesses to have a flexibility to function in a complex national and even international marketplace. This form of enterprise provides the most adaptable type of business entity in today’s world. Through the use of a corporate entity, a business may respond quickly to the changing nature of modern business. Of course, the limited liability of corporate investors is also a great advantage over other forms of business organization.

A corporation is, in many cases, afforded the legal status of a person. It may sue or be sued in its own name. A corporation may own property in its own name. In most situations, a corporation is treated as if it has a life of its own. In a legal sense, it does have a life of its own. It was born by filing the Articles of Incorporation with a state and it may die upon filing Articles of Dissolution with the state. While a corporation is alive, it is said to “exist.” During its existence, it can operate as a separate legal en¬tity and enjoy the benefits of corporate status as long as certain corporate formalities are observed. The importance of following these basic corporate formalities cannot be overemphasized. All of the advantages of operating under the corporate form of business are directly dependent upon careful observance of a few basic paperwork and management requirements.

Each major action that a corporation undertakes must be carefully documented. Even if there are only a few, or even a single shareholder, complete records of corporate activities must be recorded. There must be minutes, which are records of shareholders meetings that outline the election of directors of the corporation. Directors meetings must also be documented and the actions of directors recorded in the form of resolu¬tions. Stock certificates must be issued and the ownership of them must be carefully tracked. This is true regardless of the size of the corporation. In fact, as the size of the corporation decreases, the importance of careful recordkeeping actually increases.

Corporate existence can be challenged in court. This will most likely happen in circum¬stances where a creditor of the corporation or victim of some corporate disaster is left without compensation, due to the limited liability of the corporation. Despite the fact that the corporation has been accepted by the state as a legal entity, if the formalities of corporate existence have not been carefully followed, the owners of a corporation are at risk. The court may decide that a single shareholder corporation merely used the corporation as a shell to avoid liability. The court is then empowered to pierce the corporate veil, or declare that the corporation was actually merely the alter ego of the owner. In either outcome, the court can disregard the existence of the corporation and the creditors or victims can reach the personal assets of the owner. This most often will occur when a corporation is formed without sufficient capitalization to reasonably cover normal business affairs; when the corporation has not maintained sufficient insurance to cover standard contingencies; when the owner has mingled corporate funds with his or her own; and when there are no records to indicate that the corporation was actually operated as a separate entity. The results of such a lawsuit can be devastating. The loss of personal assets and the loss of corporate legal status for tax purposes can often lead to impoverishment and bankruptcy.

This difficulty is not a rarity. Each year, many corporations are found to be shams that were not operated as separate business entities. In a lawsuit against a small corpora¬tion, an attack on the use of corporate formalities is often the single most powerful weapon of the opposition. The best defense against an attack on the use of a corporate business form is to always have treated the corporation as a separate entity. This re¬quires documenting each and every major business activity in minutes, records, and resolutions. When it is desired that the corporation undertake a particular activity, the directors should meet and adopt a resolution that clearly identifies the action and the reasons for the action. If major actions are undertaken, the shareholders may also need to meet and document their assent. This is true even if there is only one shareholder who is also the single director. With such records, it is an easy task to establish that the actions taken were done for the benefit of the corporation and not for the personal betterment of the individual owner or owners. As long as it can be clearly shown that the owners respected the corporate separateness, the corporate existence cannot be disregarded by the courts, even if there is only one shareholder who is also the sole director and only officer of the corporation. It is not the size of the corporation, but rather the existence of complete corporate records, that provides the protection from liability for the owners of the corporation. It is crucial to recognize this vital element in operating a corporation. Careful, detailed recordkeeping is the key to enjoying the tax benefits and limited liability of the corporate business structure.

Corporate Paperwork ChecklistThe following checklist outlines the various corporate documents that should be pre¬pared and maintained during the life of a corporation: