In December, many businesses are in the midst of their busy season. Retailers are hoping for good sales. Accountants are helping businesses with year-end tax planning. Whatever your industry, there’s a housekeeping matter that shouldn’t be overlooked if your business is incorporated: holding your annual board meeting. This is a requirement in most states. Typically, these meetings are held near the end of the year to address certain matters for the coming year. What are some of the reasons you need to hold your meeting, what should be discussed, and how should you conduct the meeting? I run this blog each year, with updates, to serve as a reminder to myself and readers who are incorporated not to overlook this activity.
Why hold an annual meeting?
If you are the only owner or work with family and friends, you may think that it’s no big deal to skip the formalities. After all, you may be talking only to yourself. However, missing the meeting, which means you don’t put the meeting in writing and keep the record in the corporate minutes book, is a big deal; it can cause problems:
Loss of personal liability protection. If you don’t protect the corporate entity, creditors may be able to get at your personal assets by “piercing the corporate veil.” Even if you don’t have creditors breathing down your neck now, you could face problems in the future, and your prior failure to hold an annual meeting may come to light and hurt you then.
Missed financial opportunities. There are certain actions by the corporation that require formal approval. Here is a partial list of actions to consider in an annual meeting:
- Setting compensation for owner-employees and other top employees
- Arranging for sale-leaseback arrangements
- Giving dividends to shareholders
- Purchasing the assets of another company
- Selling corporate assets or shares
- Taking a loan (e.g., setting up a line of credit)
- Declaring dividends or distributions
Missed tax opportunities. There are various tax strategies that require the corporation to formally adopt. Here are some of them:
- Adopting an accountable plan for employee expenses and reimbursement for officer’s expenses.
- Changing accounting methods.
- Choosing to use special tax rules, such as the de minimis safe harbor for writing off the cost of items instead of capitalizing them. While a resolution isn’t mandatory, using the safe harbor requires that the business have procedures in place for it, so the resolution is a good idea.
- Making or terminating an S election.
- Instituting employee benefit plans, such as 401(k) plans, or education or adoption assistance plans.
- Retaining earnings by a C corporations, and specifying the reasons for doing so in order to avoid a potential accumulated earnings tax.
Routine housekeeping. At the meeting, be sure to address the election of officers and directors. State law dictates who can serve as what. For example, you may be able to serve as president and treasurer but need someone else to be the corporate secretary. Be sure you have required positions filled. Other matters that should be handled in the annual board meeting include:
- Changing the location of the company
- Starting or settling litigation
Where to hold the meeting
If you are the sole owner, the location and manner of the meeting obviously can be informal. Your kitchen table may do, as long as your home address is designated as the location of the meeting.
If there is more than one owner, the meeting may be held in any of the following ways, provided state law allows it:
- In person. Owners attend at a designated time and location. South Carolina requires that this option be used.
- Virtually. The idea of meeting electronically started several year ago, but its use was accelerated because of COVID-19. This virtual option enables attendance where distance may pose a problem.
- “Hybrid meeting.” Some attend in person while others do so virtually. It’s not clear whether this option is permissible.
Whatever venue is used, the same notice rules and formalities of a meeting (i.e., call to order, procedure for voting on measures, etc.) must be followed.
How to do the meeting
Check your state law requirements about when and how to give notice to shareholders of the meeting, or a waiver of notice, as well as the information to include in the minutes of the meeting. You can find templates for these actions from the following (but note pricing or free trials):
There may be blank forms in your corporate book if you got one when you incorporated. If you don’t know what to do about an annual meeting, contact an attorney.
Keep minutes of what’s discussed, which is required in most states. Follow formalities, such as assuring there’s a quorum (usually a simple majority of board members, there is proper voting procedure on proposals, and a motion to adjourn (which is seconded).
Limited liability companies (LLCs) and partnerships aren’t required by state law to hold annual board meetings. However, an LLC’s operating agreement or a partnership’s agreement may do so. But even if it’s not required by law or agreement, now is a great time to run through the list of topics listed above and consider those that relate to your situation. It can help you start the new year off right. And it demonstrates that owners respect the separation of their personal activities from their business activities.
“I felt uneasy about the rapid decisions I have always made, and wondered whether every decision should be formally ratified and minutes at a board meeting.” ~ Richard Branson, founder of Virgin Group which controls more than 400 companies in various fields.
Your annual meeting is a time to reflect on the year about to end and what you’d like to happen in the coming year. It’s a time to get input from others who can critique your past performance and your goals for the future. Where required (or even if not required), put the minutes in writing.