I don’t need to tell you that a growing lawsuit epidemic is going on in the United States and it only appears to be getting worse. Statistics reveal that 1000′s of lawsuits are being filed each month and small business owners are prime targets. It may be a disgruntled former employee… a customer… a business competitor… a total stranger… some government agency… the list goes on.

Operating a business as a sole proprietor or general partnership provides absolutely no protection against lawsuits. You leave your personal assets wide open to risk.

Don’t get me wrong. I’m an absolute believer in small businesses. They’re great . . . they help make dreams come true for many people and they can be your path to financial freedom, independence and success. They are the back bone of our society and one of the main supports of our national economy. My father was a small business owner all of my growing up years. I’m strongly in favor of small businesses.

But, small business owners need to protect themselves. The most important step you can take to protect yourself is to operate your business through a properly formed and maintained entity like an LLC.

The LLC entity was specifically created by law to provide a layer of protection between the business and its individual owners. With our lawsuit crazed society, the number of LLC’s being formed has grown by over 90% in the past few years. The main reason is protection.

Steps to conduct a special meeting of directors:

1. Send Notice to the Directors. All directors
are entitled to notice of any meeting of directors. This is
fundamental to insure that any actions taken at the meeting are
legal and authorized. Requirements for notice of a special meeting
are usually contained in the corporation’s bylaws. At a minimum,
notice should include specifics as to date, time, and location of
the meeting. The notice should also state or describe the items or
business to be discussed and voted on at the meeting. Most
corporate laws require that the notice be served or mailed at least
ten days before the meeting.

2. How to Conduct a Director’s Meeting. There
is no required procedure in corporate law for conducting a meeting
of directors. The procedure used is up to the directors and/or
shareholders of the corporation. Some (mostly larger corporations)
use a formal procedure utilizing Robert’s Rules of Order with
motions made, seconded, discussion, and then a vote. Most smaller
corporations use less formal procedures consisting of a simple
discussion on issues and then a vote. The vote can be oral or in
writing but there should be a count of the vote taken by a
corporate officer, usually the corporate secretary. An agenda of
business to be conducted at the meeting is advisable but not
required.

Special Note About Quorum Requirements: A “
quorum” refers to the number of members of a body or group required
to be present in order to transact the business of the body or
group. Quorum requirements for a director’s meeting are most often
set forth in the corporation’s bylaws. The most common quorum
requirement is for the presence in person (including presence by
electronic means such as a telephone conference call) of a majority
of the authorized number of directors. Voting requirements are also
most often set forth in the bylaws. A common requirement is that if
a quorum is present, the affirmative vote of a majority of the
directors present is required. If the number of people required to
make up a quorum is not met at the meeting, any action transacted
or resolutions passed would not be valid and could be
challenged.

3. Prepare Minutes of Meeting. A corporate
officer or someone assigned by the corporate officer, needs to keep
minutes of the meeting. The corporate secretary usually does this,
but minutes can be taken by someone else. Minutes are simply a
written record of the proceedings of the meeting. There is no legal
requirement as to the form for minutes or how detailed minutes have
to be. However, they should be detailed enough for someone reading
the minutes to know what business of the corporation was conducted
at the meeting and what resolutions passed or failed. They should
also indicate whether a notice was given for the meeting, who was
in attendance at the meeting, and who voted on various resolutions
brought before the meeting. It is also advisable, but not required,
to indicate reasons for the directors taking certain action. For
example, if the directors decided to fire the president of the
company, it would be advisable to indicate the reasons. If the
president were to file some form of legal action relating to the
action, the minutes would reflect the directors’ reasons for taking
the actions.

Special Note: If a director is present at a
meeting but does not vote, he/she is generally considered to have
assented to or agreed with actions taken unless the director makes
his/her objection known. For a director’s own protection, any
objection to corporate action should be in writing or noted in the
minutes.

Minutes are seldom audited by government agencies and are mainly
for the use of the corporation. They do become important documents
in the event of legal actions involving directors, shareholders, or
others or in the event of disputes between shareholders. Generally,
the more information that is contained, the more helpful the
minutes will be in the event of disputes. A copy of the minutes
should be kept in the corporate records.

There are many different methods used for trying to appraise the
value of a business and the value of shares in a corporation.
Note: An appraisal is merely an opinion and several different appraisers
may come up with different values.

The value of stock in a small corporation is really the value of the
business divided by the number of shares of stock issued. In valuing
the business, many factors should be considered. These may include
such things as the value of assets owned by the business, the net
profit of the business, the nature of the business, the competition,
whether the business is in a growing or declining industry, the
impact on the business of a shareholder who is a key person in the
business leaving, etc.

Note: Accountants or appraisers will almost always discount or reduce the
value of minority shares (shares with insufficient voting power to affect
corporate votes) in a small corporation. This is because the minority shares
usually are not able to control what happens with the corporation so the
shares are not worth as much as majority shares.

Methods for Valuation – One standard method is to have the
corporation’s accountant place a value on the shares of stock. If
either shareholder does not agree, then the disagreeing shareholder
can request a valuation from a second accountant and the two
valuations will be averaged. If the shareholders then cannot agree
on the valuation, the two accountants choose a third accountant to
provide a valuation and the three valuations are then averaged to
come up with a final valuation. Obviously, this process can get
expensive and is probably beyond the means of most small
corporations.

One simple approach is to require the shareholder leaving to place a
value on the shares. The shareholder remaining then has the option
to either buy the shares or sell his/her shares for the same price.
This forces the shareholder leaving to try to come up with a fair
price. The point is that if the shareholder leaving places too high of a
price on the shares, it will be to the advantage of the other
shareholder to sell his shares because he/she will be getting better
than market value. If, on the other hand, the shareholder leaving
places too low of a value on the shares, it will be to the advantage of
the other shareholder to purchase the shares since he/she will be
getting the shares for less than their market value.

For more articles on valuation of a business visit:
http://www.valuationresources.com/Publications/GeneralPubs.htm

Separation in a small corporation is somewhat analogous to a divorce. You have to decide what the business is worth and what each shareholder wants out of it. Often, the remaining shareholders want to keep the business operating so the question really becomes one of valuing the interest of the shareholder leaving. It is wise business planning for shareholders to have already discussed this possibility and prepared for it by entering into some form of Buy-Sell or Shareholder Agreement.

A Buy-Sell Agreement sets out the procedure for the purchase of shares by the corporation or remaining shareholders and the method to value the shares. Buy-Sell Agreements are sometimes prepared up front as part of the initial incorporation process and sometimes later on.

If the shareholders have made no plans and have no agreement, then they will have to negotiate a separation and decide on how to value the stock of the shareholder leaving. This is much harder to do if left to the time when a shareholder is leaving than it is early on in the corporation’s existence.

If shareholders simply cannot agree and become deadlocked and unable to make a decision, one of them may have to file a petition with the court to dissolve the corporation and distribute the assets. This, of course, is usually a last resort due to the time and costs involved.

If you have a street address but most of the time no one is at home or at the address, then you may want to consider using a corporate registered agent so that you make certain you get important legal documents or notices.

Non-par value stock is stock that has no stated
value. The shares are issued for consideration or value as
determined by the board of directors. The value of non-par value
stock generally changes or fluctuates with the value of the company.
One of the required parts of the initial articles of incorporation is a
description of the corporation’s authorized stock and whether it is
par, non-par value stock and/or preferred stock.

If a corporation is sued and the question of limited liability protection
for the shareholders is raised, then the failure to hold corporate
meetings may be one factor among others, which a court will look at
to determine if the corporation is being operated as a separate legal
entity under the law. My experience is that failure to hold corporate
meetings, in and of itself, will probably not be sufficient for the court
to disregard the corporate identity and hold the shareholders
personally liable. However, holding meetings and preparing minutes
will give the shareholders and directors a stronger argument that
they have been observing corporate formalities and have been
operating the corporation as a separate legal entity.

Minutes are also important in the event of disputes between
shareholders or officers and directors. They provide important
evidence of what the parties intended with respect to various
corporate actions.

A corporation can also satisfy this requirement by using a Consent in
Lieu of Meeting document instead of having an actual meeting.

My recommendation to the shareholders of a small corporation is
that they hold their annual shareholder and annual director meetings
each year and make certain minutes are prepared for each of the
meetings. If they have other business during the year, which
requires debate and a vote, they should hold a special meeting as
needed. Other business can also be conducted by using the Consent
in Lieu of Meeting form. Having minutes (or a
Consent in Lieu of Meeting form) for the annual meetings and one
or two other meetings during the year is evidence that you are
making a good faith effort to comply with the corporate formalities.

Articles of Incorporation – This document, which is also
sometimes referred to as the Corporate Charter or Certificate
of Incorporation, is the official document filed with the
Corporate Filing Office (usually the secretary of state’s office).
It sets out the basic organization and structure of the
corporation. The required contents vary from state to state
but usually include, at a minimum, the name of the corporation,
the name and address of the incorporator, the name and
address of the registered agent, and the stock structure of the
corporation (how many shares of stock are authorized to be
issued). Optional provisions of the articles of incorporation may
include such items as special stock structure for preferred
shares of stock, the names of the initial directors, pre-emptive
rights for shareholders and an indemnification clause for
directors. Any changes made to the articles of incorporation
must be approved by shareholders and filed with the state.
Most Corporate Filing Offices have standard forms available
for articles of incorporation.

Bylaws – This document is not filed with the Corporate Filing
Office but is an essential document for the organization of the
corporation. Bylaws contain the regulations and rules adopted
by a corporation to govern its internal affairs. Bylaws provide
the framework for conducting corporate business such as:
requirements for holding meeting, voting requirements,
quorum requirements, qualifications and appointment
procedures for directors and officers, etc. The state
corporation law provides the requirements for bylaws. Most
bylaws are fairly standard but are important and should be
read and understood by the officers, directors, and
shareholders of the corporation.

Minutes of Organizational Meeting – Once Articles of
Incorporation are filed with the Corporate Filing Office, the
initial directors of the corporation should hold an
organizational meeting. (If initial directors were not named in
the Articles of Incorporation, then the incorporator can
appoint initial directors by way of a Consent in Lieu of
Corporate Meeting or by adopting a resolution for that
purpose.) The main business normally conducted at an
organizational meeting includes the approval and ratification of
the Articles of Incorporation, adoption of bylaws, the
appointment of officers and the authorization for the issuance
of shares of stock. Other business may also be conducted as
needed.

If all directors are in agreement, then the business of an
organizational meeting can also be conducted by preparing a
Consent in Lieu of Corporate Meeting document providing
resolutions for the various items of business described in the
paragraph above. The consent must be signed by all directors.

Stock Certificates – Shareholders own a corporation and stock
certificates are evidence of their stock ownership. Certificates
are not required in most states, but it is still considered good
practice to issue certificates to help provide evidence of the
organization of the corporation. From a purely practical point
of view, people like to have something to show ownership and
shares of stock provide that. However, the real authority for
ownership of shares is a board of director’s resolution
authorizing shares to be issued to a certain individual or entity.

Shareholder’s Agreement (optional) – Some shareholders
desire or need to enter into a more specific agreement
concerning their relationship, especially with respect to the
issues of what happens when a shareholder dies or decides to
leave the business. Sometimes these issues are covered in the
bylaws, but most often special provisions are set out in a
separate agreement such as a Shareholder’s Agreement or a
Buy-Sell Agreement. These documents may contain special
procedures and requirements that must be followed if a
shareholder dies or decides to leave the corporation, and can
also provide a formula or procedure for determining the value
of shares.