Corporations are required by law to hold annual meetings of the shareholders (or pass written resolutions instead), and to keep the corporation's records up to date.
Besides ensuring that the corporation complies with the law, there are several reasons why it's important to pass annual resolutions of the directors and shareholders and keep a corporation's minute book up to date:
Avoid the Requirement of Audited Financial Statements
By law, the shareholders of a corporation (whether they hold voting or non-voting shares), are entitled to receive audited financial statements of the corporation each and every year.
Obtaining audited financial statements can be a significant expense for a small private corporation, and most small business owners believe that the additional protection provided by the formal audit is not worth the extra expense.
If the requirement for an audit is not waived in writing by the shareholders EACH YEAR, a shareholder could claim at a later date that the financial statements of the corporation should have been audited, rather than provided on a less stringent Notice to Reader or other review basis. This means that the corporation may be required to go back and have it's financial statements audited for several years (which could easily cost tens of thousands of dollars).
We've witnessed this being used by disgruntled shareholders as a negotiation tactic on several occasions. They state that they will demand to receive audited financial statements for the past 5-10 years if they don't get what they want. This may seem unfair, but if the requirement for audited financial statements hasn't been waived each year, they are within their rights to request this, and courts will almost certainly require it if push comes to shove.
By passing appropriate resolutions of the shareholders each year, and providing in such resolutions that each shareholder waives the requirement for audited financial statements, this significant expense can be avoided.
Ensuring that Directors are Properly Appointed
In some jurisdictions, directors of a corporation are limited to serving for a limited number of years unless re-appointed by the shareholders. Re-appointing and confirming the directors in each year is a prudent step to ensure that the directors of the corporation are properly appointed and have the authority to bind the corporation.
Maintaining Value and Ability to Sell the Corporation
A corporation's minute book is something that banks, investors and purchasers of shares of the corporation will likely want to review prior to agreeing to any transaction.
Having an incomplete minute book is often a sign that the corporation has not taken care of important details and may result in a bank, investor or purchaser backing away from a potential deal.
Avoiding Issues that Cannot be Rectified
It may not be possible to obtain the necessary signatures at a later date due to a shareholder or director's death, incapacity, or a dispute with other shareholders of the corporation, making it impossible to bring the corporation's records up to date and in compliance with the law. Again, this can cause issues when it comes time to sell the business.
Identifying Potential Issues Early
Requiring shareholders and directors to approve decisions of the corporation on a yearly basis gives them the opportunity to raise any issues or concerns they may have with the business and the way it's operated.
If they sign the resolutions without objection, it's evidence that they had not issues or concerns with the way that the corporation was being operated at the time of signing. If they're presented with the resolutions and refuse to sign, their concerns can be addressed in a timely manner.
In our experience, it's best to address issues or potential issues head on, rather than letting them fester and grow into a bigger problem.
How we can Help
Our corporate law services (which are included for one year with our Premium and All In incorporation packages), include preparing annual resolutions of the directors and shareholders of the corporation.
Full details of our corporate law services will be contained in a Registered Office Agreement to be signed at the time of incorporation.