Corporate Minutes Stack The Deck In Favor Of Asset Protection — 50 Years Of Case Law Don’t Lie!
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Nearly 50 years ago, the California Supreme Court listed the factors that are evaluated when a judge is asked to hold a shareholder personally liable for the debts of a corporation. This is commonly referred to as “piercing the corporate veil”. Click here to see the list. Some of the factors include whether the corporation was adequately capitalized, whether corporate assets were used by the shareholder for personal use, and whether there was commingling of corporate and personal funds.
In the day-to-day insanity of running a small business, it’s frequently hard to avoid some of these factors. Who hasn’t needed to pull some money out of the business bank account to fix a plumbing leak at home or pay their kid’s summer camp bill? The good news is that Courts don’t require perfection. They just look at the facts and circumstances to determine whether on balance, it seems like the corporate form has been respected.
That’s why it shocks me when I see small corporations fail to nail the easy ones on the list. Remarkably, one of the most important factors is also incredibly easy for a small corporation to satisfy — keeping corporate minutes. Whether a corporation keeps corporate minutes is a factor that comes up in virtually every court case involving “alter ego” liability. In the leading California case on alter ego liability, the court recognized that the corporation was undercapitalized, but refused to pierce the corporate veil, because the corporation held “a number of meetings” and kept minutes.
Corporate minutes are always a factor that stacks the deck in favor of the shareholder. In one case, a corporation’s inadequate capitalization was not sufficient to establish alter ego liability where the sole director, officer, and shareholder conducted annual board meetings and “memorialized the meetings in the corporate minutes.” Despite being the sole director, the individual even went so far as to call special sessions of the board to authorize important corporate decisions, such as the purchase of an office building, and those sessions “were also memorialized in the corporate minutes.”
On the flip side, not maintaining corporate minutes always spells trouble for a shareholder. In Krausz Puente LLC v. Westall, the shareholders were personally liable for more than $4.5 million in damages. The Court noted that the shareholders “elected not to memorialize [even] the most significant events in the history of the corporation in the minutes”.
If you are sued as the “alter ego” of your corporation, one of the first things that happens is that you have to produce a copy of your corporate minute book. One Court noted (rather obviously) that “it is simply not enough to have a minute book if no minutes are kept in that book”, but far too many small corporations have a dusty, faux-leather corporate minute book without any minutes kept in the book. In one case involving a DJ, the shareholder was held liable for $77,000 where he could not produce a “single slip of paper” showing that he held formal meetings or kept corporate minutes. Being able to respond with copies of properly maintained minutes — a very simple task for a corporation that regularly holds meetings and keeps minutes — is a significant first step in protecting the shareholders from being held personally liable for the corporation’s obligations.
To learn more about the impact of keeping corporate minutes on alter ego liability and the cases described in this article, see Avoiding Alter Ego Liability with Proper Corporate Minutes.