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Individuals form corporations and limited liability companies (“LLCs”) in order to have the benefit of limited liability. Of course, filing the necessary Articles of Incorporation or Articles of Organization with the Secretary of State is a necessary prerequisite to gaining the status as either a corporation or LLC. However, that is just the start.

Many commentators compare the filing of the Articles as the birth of the entity and once created, the entity takes on a separate existence. Because of this separateness, the entity’s history, or record, must be preserved, as there is no other means to document actions and considerations taken by the entity. That preservation is accomplished through minutes or written consents.

Clarification is warranted here. Under Missouri and Illinois law, an LLC does not have to conduct an annual meeting. Routinely, the idea of not being required to prepare minutes or consents is given as a reason for electing the LLC form in which to conduct business versus a corporation, which is required to conduct an annual meeting. It should be noted that “not being required” is not synonymous with “not a good idea.”

A record of an LLC’s activities outside its ordinary course of business still has a place in the LLC’s existence. Not only does a contemporaneous record arguably carry more weight if an action is brought to pierce the company’s veil in order to subject the owner with personal liability, but for some matters, other laws, such as the Internal Revenue Code (“IRC”), mandate the formal adoption of benefit and pension plans, reimbursement and travel policies and the like prior to recognizing expenditures in furtherance thereof to be deductible.

Meeting minutes can be extremely detailed or more of a summary of the discussion which occurred and the action taken, even if the action is merely to table the proposed action until another date. Both shareholders and directors of corporations, as well as members and managers (officers) of LLCs can, and do, hold meetings.

Written consents are just that: written resolutions which authorizes stated action. Background preliminary to authorizing any action is frequently included so as to explain or ground the action in the context in which it is taken if it is not self-evident from the authorization granted. An example of this would be why a loan is taken from a shareholder or financial institution, or in the case of a C-Corporation retaining earnings in excess of the amount permitted under the IRC without being liable for excise taxes on excessive accumulated earnings.

As stated above, corporations are required to conduct at least an annual meeting. Special meetings are required upon the occurrence of events which statutorily require such, e.g., a sale of all or substantially all of the assets of the company or a merger or consolidation, or may be conducted in accordance with the corporation’s By-Laws.

LLCs may conduct meetings, whether annual or special, regardless of whether the LLC’s Operating Agreement provides a procedure for calling and conducting such meetings. In fact, persons who act without authority on behalf of an LLC do so at the risk of being jointly and severally liable for all debts and liabilities incurred in taking such actions. Similar to corporations, state LLC Acts require that upon certain extraordinary events, such as issuance of an interest in an LLC, admitting a person as a member, changing the status of an LLC from member-managed or manager-managed or vice versa or changing the capital structure requires that an affirmative vote, approval or consent of the members is required.

While large corporations and LLCs regularly document actions through use of minutes and consents, even closely-held entities with only a few owners, or even a sole owner, must document the entity’s actions which are outside its ordinary course of business. In “Piercing the ‘Veil’ of a Company’s ‘Limited Liability,’ or, Looking Through the Entity to Hold Owners Liable for a Company’s Debts,” a prior article we published, we recounted how a Missouri Court imposed liability upon an 80% owner of an LLC partially on the basis that there was no written resolution authorizing the acceptance of a consent judgment in a lawsuit in which the LLC agreed to pay a certain amount as damages. Recall that an LLC is not required to conduct an annual meeting, and thus many individuals incorrectly believe that they are excused from any recordkeeping with respect to authorizations and the like. (To read the full article on “Piercing the ‘Veil”, click here.)

In another case of addressing the absence of a corporation’s minutes, a Missouri Court held that advancement of funds were to be considered as contributions and not as loans to the corporation where no board resolution had been adopted acknowledging the loans or corporate minutes created even referencing the loans. Thus, in that instance, the contributing shareholder was not entitled to repayment of such contributions prior to distribution of the liquidation proceeds pro-rata to all the shareholders.

While matters which are in the ordinary course of business need not be authorized by adoption of written consents or formal actions of a meeting, those matters which are not in the ordinary course of business, or sometimes referred to as extraordinary, should be documented. While no list can be all inclusive, the following is a list of some of the more common matters which are documented by written consents or meeting minutes:

  • Issuance of additional shares or membership units;
  • Compensation and bonus payments for employees who are also shareholders or members, as well as officers and managers;
  • Distributions made under an S-corporation and dividends under a C-corporation;
  • Changing the identify of directors, officers or LLC managers;
  • Change in tax status as with electing or terminating S-Corporation status;
  • Adoption or amendments to pension and benefit plans;
  • The sale, purchase or lease of real property or major capital equipment (unless such activity is your ordinary course of business);
  • Opening and closing bank accounts;
  • Loans to or from shareholders, officers, directors or LLC managers;
  • Adoption of fictitious trade names;
  • Contracts with key employees;
  • Bulk sales, consolidations, mergers or termination of entity existence;
  • Status of pending litigation; and
  • Accumulation of earnings in excess of amounts permitted under the IRC.