Steps to Amend the Bylaws:

1. Schedule Board Meeting. Schedule a meeting of the board of directors and send written notice to all board members. The notice needs to state the purpose of the meeting, which is to amend the Bylaws of the corporation. Other business can also be conducted at the meeting if it is stated in the notice. A form for the type of notice to be used is available here.

2. Pass Resolution Authorizing Amendment. A quorum must be present for the meeting in order to conduct business. The Bylaws should indicate how many directors are required to make up a quorum. At the meeting of directors, a vote must be taken on whether to amend the Bylaws and what the amendment will be. A vote to amend Bylaws must normally pass by a majority of those present at the meeting. The following is an example of the type of resolution that would normally be voted on:

”RESOLVED, that paragraph ___ of the Bylaws of the corporation shall be amended to increase the number of directors on the board of directors from 5 to 7.”

3. Prepare Minutes. If the resolution passes, then the resolution should be prepared in the form of minutes and placed in the corporation’s records. The secretary or other corporate officer should then make the change in the corporate Bylaws. It is helpful to keep the old Bylaws for reference purposes and title the new ones as Amended Bylaws so that a written history of changes is preserved.

4. Alternative Method. Instead of holding an actual meeting of directors, the action to amend the Bylaws can be accomplished by preparing a written Consent in Lieu of Corporate Meeting setting forth the resolution to be considered. If all directors are in agreement and are willing to sign the consent document, then this action can be accomplished without the need to hold an actual meeting.

Steps to Amend the Articles of Incorporation:

1. Easiest Method. The Corporate Filing Office
may have a form, either online or available upon request, which you
can fill out and file. So check with them first to see if the form
is available. If the form is available, you will need to describe
the change to be made and indicate that the change is approved by
the shareholders of the corporation. There is usually a small
filing fee involved. Before you file the form, you will need to get
corporate authority to take the action (The procedure for this is
described in the next paragraph).

2. Obtain Corporate Authority. Whether you use
an online form from the Corporate Filing Office or follow the
procedure outlined , you need to have corporate authority. Most
amendments to the articles of incorporation require approval of the
shareholders as well as directors. This is actually a protection
for shareholders so that fundamental changes to the corporation
cannot be made without their knowledge and approval. Authority to
amend the articles of incorporation can be obtained by preparing a
Consent in Lieu of Corporate Meeting or in holding a special
meeting of shareholders.

Please Note: This resolution can be inserted in a set of
minutes or inserted in consent in lieu of corporate
meeting.

3. Prepare Articles of Amendment. If the state
Corporate Filing Office does not have a form to use for amending
articles of incorporation, you will need to prepare one. The form
is often titled, “Articles of Amendment.” The Articles of Amendment
contain basic information about the corporation and then describe
the amendment or change to the articles. They also frequently
indicate the number of shares which voted in favor of the amendment
and the number of shares, if any, which voted against the
amendment. This form will then need to be filed with the Corporate
Filing Office together with a filing fee. Before filing the form,
you will need to obtain corporate authority

That’s where a properly drafted Buy-Sell Agreement or Shareholder’s Agreement can help. These agreements can require that in the event of death, the shares of a deceased shareholder will be purchased by the corporation itself or by the remaining shareholders. The agreements usually set out a procedure for the buy out and a method for valuing the shares of the deceased shareholder. In this way, the deceased shareholder’s heirs get paid for the stock but are not involved in the ongoing operation of the corporation.

If one of the parties to the divorce is actively involved in the operation of the small corporation, the courts will usually agree to the continued operation of the corporation by that party but will offset the value of the shareholder’s interest in the corporation with an equivalent value of other property to be given to the other spouse. The other property could be in the form of payments from the shareholder’s share of income from the
corporation, or it could be other property owned by the parties.

In most cases, it is to the advantage of all parties that the business continues to operate and generate income. Therefore, the preferred solution is some arrangement whereby the business goes on and one spouse is provided equivalent or similar compensation from other assets of the parties.

Incorporator – The incorporator is the person or entity that files the initial articles of incorporation with the state Corporate Filing Office. The incorporator does not have to be a shareholder, director, or officer of the corporation. Sometimes the incorporator will be an attorney or other person who is assisting with the organization of the corporation. Often, the incorporator(s) will be one or more of the initial organizers of the business. Depending on who the incorporator is, once the initial paperwork is filed, the incorporator may or may not have any further involvement with the corporation.

Shareholders – Shareholders are the owners of the business. They own a percentage of the whole business determined by the number of shares of stock they have been issued compared with the total shares of stock that have been issued. For example, in a one-person corporation, the sole shareholder owns 100% of the issued stock. In a three-person corporation, if each shareholder owns equal shares then they each own 1/3 of the issued shares of the corporation. Each time more shares are issued, the percentage ownership for each shareholder may change.

Shareholder Rights – The rights of shareholders are usually set out in the state corporation laws and generally include:

(a) the right to vote for directors of the corporation;

(b) the right to participate in dividends, if the payment of dividends is authorized by the directors and;

(c) the right to inspect the corporation’s’ books and records, upon giving reasonable notice to officers or directors. Shareholders do not own specific corporate property but rather a percentage of the corporation, which in turn, owns the corporate property.

Dissenter’s Rights – Some state corporation laws afford rights to minority shareholders, meaning shareholders who do not own enough shares to control a vote, who dissent or disagree with majority shareholders on major issues in the corporation. Usually, these statutes provide a specific procedure for valuing the minority shares and requiring the majority shareholders to buy out the minority.

Shareholder Duties and Obligations – Shareholders are obligated to pay the agreed upon value or consideration for their shares. Ordinarily, shareholders are not personally liable for the debts and obligations of the corporation. However, if the corporation becomes insolvent and cannot pay its bills, and one of the shareholders has not paid for his/her shares, he/she could be required by a creditor to pay the agreed upon value for the shares. Beyond payment for the shares, a shareholder has no obligation unless a court pierced the corporate veil and found them personally liable for corporate debts.

Majority Shareholders – Some state incorporation statutes impose a fairness standard on majority shareholders, meaning shareholders who own enough shares to control voting, usually 51%. This means they cannot take undue advantage of minority shareholders by taking corporate actions that are unreasonable or appear to serve no legitimate corporate purpose. Examples might be giving larger dividends to majority shareholders than are given to other shareholders or voting to have the corporation buy property that belongs to a majority shareholder at an inflated price.

Directors – Individual directors make up the board of directors. The board of directors as a group has authority to make the management decisions for the corporation as opposed to the day-to-day operation of the business, which is normally a function of the officers. A director does not have to be a shareholder or an officer of the corporation, although in many small corporations, the same individuals act in all three capacities. The only requirement to be a director in most states is that a director be 18 or older. Most state corporate laws allow just one director while some require at least as many directors as there are shareholders. The typical directors are elected by shareholders, usually at the annual shareholder’s meeting but may be appointed by other directors to fill a vacancy in the board of directors. The corporation’s bylaws should set forth the election procedures and qualification requirements for directors.

Director’s Meetings – Directors as a board or group make management decisions for the corporation. Corporations are required to have an annual meeting of the board of directors. Any other meetings are special meetings of the board. Larger corporations tend to have more meetings while smaller corporations often have fewer board meetings.

Director’s Duties – Directors have a fiduciary obligation to the corporation and its shareholders to act in their best interest in making business decisions. A director has a duty to exercise due care in making business decisions.

This duty has been defined in various ways such as, the following: “A director must act in good faith, in a manner the director believes to be in the best interest of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar conditions.”

Duty of Care – His is a broad standard and most courts interpret it to mean that a director can make mistakes so long as they had a good reason for making a certain decision. In other words, lawsuits against directors in small corporations are usually difficult to prove and therefore not very common.

Example: A director who votes in favor of the corporation’s purchase of another business which turns out to be unprofitable, will generally not be liable to shareholders so long as the director performed reasonable due diligence and relied upon reports from the corporation’s professional advisers such as accountants and attorneys.

Duty of Loyalty – This means a director must not take individual advantage of a corporate opportunity without first making the opportunity available to the corporation. If the corporation decides not to pursue the opportunity, then the director can.

Example: A director who, while searching for a parcel of property to build a new corporate building, finds property well below market value and decides to buy the parcel for himself with the intent to sell it for a profit. This would be a breach of the duty of loyalty unless the director first informs the corporation about the property. If the corporation, through its board of directors, decides not to purchase the property, then the director would be free to do so.

Conflict of Interest – A director should not benefit personally from a transaction or deal unless there has been full disclosure to and approval of the board of directors. A director or any other party who stands to benefit personally from a transaction or deal should not vote on the action.

Example: Suppose a director owns stock in a company that owns a parcel of property that the corporation would like to lease. The director needs to make certain that his/her interest in the corporation that owns the property is disclosed to the other board members and that they approve of the transaction.

Officers – Officers are generally appointed by the board of directors and are responsible for overseeing and managing the day-to-day operations of the corporation. The basic duties of officers are generally set forth in the bylaws and may be set out in a separate employment agreement. Specific duties can be assigned by the board of directors. Officers do not have to be shareholders or directors but in most small corporations they often serve in all three capacities as an officer, shareholder, and director.

The most common offices in a small corporation are president, vice president, secretary and treasurer. However, the board of directors can add to or take from that list depending on the needs of the corporation (state corporation laws should be reviewed to see what officers may be required by law). In most states, one person can hold all of the offices or they can be divided between two or more people. In a small corporation, the officers may not actually be paid for their service as an officer of the corporation but rather for their actual services to the corporation such as a salesman, accountant, or manager.

Special Note: If a corporation has two or more people involved, it is practical to make certain the president and secretary are different people. This is because banks and other financial institutions often require the signature or certification of the corporate secretary to attest that the board of directors has authorized certain items of business such as a formal banking resolution. If the president and secretary is the same individual, then some explaining often has to be done. The secretary does have the important function of keeping the books and records of the corporation, which are required by corporate statutes.

Caution: Officers, like shareholders, are generally not liable for their acts while working for the corporation. However, they can be personally liable for harm caused to another person if the damage was caused by their negligent or intentional act.

Officers have ostensible or apparent authority to bind the corporation to contracts or agreements unless the party with whom they are dealing is aware they do not have authority to act on behalf of the corporation. Also, an officer could be held personally liable on an obligation if it appears the officer has signed an agreement individually and not in their capacity as an officer of the corporation. That’s why it is very important that documents are signed in a way that clearly indicates the person signing is doing so for and on behalf of the corporation.

I regularly recommend someone form an LLC that makes the S corporation tax election. S corporations provide the same liability protection as regular corporations which have a long legal history in the courts with respect to liability and tax issues. This provides good predictability of the outcome when you go to court or fight with the IRS.

I still believe S corporations are a good entity choice for small businesses. So why do I now routinely recommend they form an LLC that makes the S corporation election?

Let me explain. LLC’s provide the same or similar liability protection as do corporations. LLC’s have now been around long enough that they are starting to have more predictability with legal and tax issues. If you form an LLC that makes the S corporation election, you can also save on the FICA taxes just like an S corporation. LLC’s tend to be more flexible and easier to operate than corporations. Depending on state law, it may be harder for creditors to get to the ownership interest of an LLC than it is to get to stock ownership in a corporation.

Special Note: While officers, directors, or shareholders, are generally not liable for their acts while working for the corporation, they can, however, be personally liable for harm caused to another person if the damage was caused by their negligence or by an intentional act.

Another way to discontinue is to file Articles of Dissolution with the secretary of state. Many states will have a form you can use on their website or you can contact them to obtain a form. When filing this form, you will need to indicate that all of the corporation’s creditors have been paid and there are no outstanding debts. Again, you will still need to notify the IRS and state taxing agencies that you are out of business or they will keep sending you forms and expecting to receive your tax returns.

Finally, you can file with the court requesting that the corporation be dissolved. This procedure is usually done only when the shareholders or other involved parties cannot agree on conducting business or on how to liquidate and distribute assets of the corporation. By doing this, you are asking a judge to review the facts and decide for you.

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.

You or any shareholder, officer, or director of your corporation (or other individual you know) can act as a registered agent for your company so long as you or they have a street address in the state. It is wise to make certain the address you list is one where someone will be present most of the time and where you can receive service or mail. This is important because you want to make certain you receive important legal documents or important notices from the secretary of state concerning you business so that you will be able to take appropriate action. If you fail to receive these documents, you could place your business in difficult circumstances such as a default in a legal action.