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An Introduction to Your Corporation
|TO: |Shareholders and Directors of [Name of Corporation] |
|FROM: |[Name of Attorney] |
|DATE: |[Date] |
You have chosen a Michigan corporation for your business. This memo explains how a corporation works; what rights and duties corporate directors, officers, and shareholders have; how directors and shareholders vote; and how to make the most of a corporation’s liability protections.
Corporation Basics
Look at your corporation’s articles, bylaws, and shareholder agreement! Read your corporation’s articles, bylaws, and any shareholder agreement before drawing any conclusions about the relative rights and duties of shareholders, directors, and officers. If none of these documents address the subject, the corporation statute might.
Articles. Your corporation was formed by filing articles of incorporation with the state of Michigan. The articles are a public document. The articles typically contain little more than the corporation’s name, resident agent, and registered office. But, the articles may contain other terms affecting the corporation and its shareholders, directors, and officers.
Bylaws. Your corporation should have bylaws, but these bylaws are not filed with the state and are not a public document. The bylaws typically contain procedural rules for such things as notices of meetings, voting, and taking actions without meetings. Bylaws can typically be amended by the directors without shareholder approval, but this amendment power can be restricted.
Shareholder agreement. If your corporation has more than one shareholder, your shareholders should have a written agreement to restrict share transfers and address share purchases on a shareholder’s death and other triggering events.
What rights and duties do shareholders, directors, and officers have? Shareholders, directors, and officers have significantly different management rights, authority, and fiduciary obligations. The following chart shows the key differences (almost any of which may be altered through specific corporate procedures):
|Position |Management Rights |Authority to Bind the Corporation |Fiduciary Obligations to Others in|
| | | |the Corporation |
|Shareholders |Shareholders have no management |Shareholders have no authority to bind the |Shareholders generally have no |
| |rights. |corporation. |fiduciary obligations to each |
| | | |other or the corporation. |
|Directors |Directors have all management rights |Individual directors do not have authority to|Directors have fiduciary |
| |of the corporation. |bind the corporation. |obligations to the shareholders |
| | | |and to the corporation. |
|Officers |Officers have no general management |Generally, officers have authority only as |Same as directors. |
| |rights. Their rights and duties are |determined by the board. But, officers may | |
| |described in the bylaws. |also have apparent authority to bind the | |
| | |corporation. | |
Does the board of directors run the corporation’s business? Yes. The board of directors (sometimes referred to as the “board” or the “directors”) manages the corporation’s business, subject to whatever limits are contained in your articles, bylaws, or shareholder agreement. The bylaws usually describe the shareholders’ rights to elect, compensate, remove, and replace the directors.
Who controls distributions to shareholders? The board does, unless the articles, bylaws, or shareholder agreement state otherwise. The board has no authority to approve a distribution, however, if it would make the corporation insolvent. Distributions may also be limited by corporate agreements with lenders or others.
Must a corporation have officers? Yes. Every Michigan corporation must have a president, secretary, and treasurer. One or more of these offices can be held by the same person.
Who may issue shares? The board has the authority to issue shares to any person, whether or not that person is already a shareholder. Shareholders will typically restrict the board’s authority to issue additional shares, especially to new shareholders.
May shareholders transfer their shares? Yes. Shareholders may sell or give their shares to anyone they want. Typically, however, this right is restricted in the articles, bylaws, or shareholder agreement.
What rights does a share recipient have? The recipient becomes a shareholder and enjoys all shareholder rights previously held by the seller. These rights include such things as the right to vote, receive distributions, and inspect corporate records.
What voting rights do shareholders have? Each shareholder owning voting shares may vote on matters requiring shareholder approval, unless the articles, bylaws, or shareholder agreement limit or remove that right. Shareholders typically are entitled to one vote per share. Your articles, bylaws, or shareholder agreement will describe any deviations from this rule and will also describe (1) what percentage vote is required to approve the action (simple majority or some other percentage) and (2) whether that percentage is applied to all shares or only those that are represented and voted at a meeting.
Do shareholders have fiduciary duties? No. Generally, shareholders owe no duties of loyalty to each other or to the corporation. A shareholder may be liable, however, for willfully oppressive actions taken against other shareholders or the corporation. This is sometimes referred to as shareholder oppression.
Do directors and officers have fiduciary duties? Yes. Unlike shareholders, directors and officers must act in the corporation’s best interests, not in their own interests. They may not favor one group of shareholders over another group if those actions are “willfully oppressive” to some shareholders.
Directors and officers may not take personal advantage of an opportunity that could be useful to the corporation. They may not cause the corporation to enter into a contract with one of them on terms that are less favorable to the corporation than the terms that the corporation may have reasonably obtained from a third party. Two examples illustrate how fiduciary duty problems might arise in a corporation. Assume that you are a director or officer.
Example 1: You learn that the vacant lot next to the corporation’s office will be for sale soon. The shareholders have always wanted that lot for the corporation’s expansion and parking. Instead of telling the shareholders about the seller’s desire to sell, you purchase the lot yourself, hoping to resell it to the corporation for a profit. Your failure to give this opportunity to the shareholders may violate your duty of loyalty.
Example 2: You provide property management services to the corporation to manage several of its properties in the state. Other property management companies in the area charge much less than what you charge the corporation. You know about those companies and their fees but your shareholders do not. Your fees to the corporation may violate your duty of loyalty to the corporation.
Directors and officers also must act with reasonable care. They cannot act frivolously or carelessly, for example. They may be protected from liability for some kinds of carelessness, though. Consult your articles for these optional protections.
What decisions do the shareholders make? Shareholders must vote on each of the following:
• amendment of the articles (also needs a board proposal)
• shareholder agreements
• election, removal, and replacement of directors
• dissolution of the corporation
• merger of the corporation
• sale of substantially all of the corporation’s assets
Consult your articles, bylaws, and shareholder agreement for specifics, including any modification of these rules and any additional actions requiring shareholder approval.
What decisions does the board make? In a typical corporation the board makes all of the corporate business decisions, such as the following:
• day-to-day corporate operations
• employment agreements for any corporate director, officer, or shareholder
• election of officers
• loans to or from the corporation
• leases involving the corporation
• distributions to shareholders
• approval of any major purchase, sale, or other significant corporate transaction
• issuance of shares to existing or new shareholders
• proposals to amend the articles of incorporation
• amendment of bylaws (unless this is reserved to the shareholders)
The board may delegate some of these decisions to officers. Consult your articles, bylaws, and shareholder agreement for any modification of these rules and any additional actions specifically requiring board approval.
How do shareholders and directors make decisions? Shareholder and board decisions can be accomplished either through meetings or written communication unless restricted by the articles, bylaws, or any shareholder agreement. These documents contain specific procedures you must follow to obtain valid approval through the use of a meeting or written communication.
Must the corporation hold meetings or send reports? The corporation must hold an annual shareholder meeting. Director meetings may be required by the bylaws. The corporation must keep certain business records available to shareholders, such as corporation tax returns, a list of current shareholders, etc. Consult your articles and bylaws for any other required meetings, reports, and other activities.
Your corporation must file an annual report with the Michigan Corporation Division. The state sends the report form each year to the corporation’s registered agent at the corporation’s registered office. If the corporation does enough business in other states, the corporation may have to register in those states to do business as a foreign corporation.
We recommend that you consult an accountant to determine what corporate financial records must be kept. An accountant can also assist in preparing any required tax filings.
The Corporation’s Liability Shield
Does the corporation give “limited liability” protection to its shareholders? Yes. The corporation’s shareholders have no personal liability for the corporation’s obligations. Neither do its directors or officers. This limited liability protection is similar to that enjoyed by limited liability company members. It is also a bit more complicated than meets the eye. Consider these two examples that have opposite results:
Example 1 (liability protection): The corporation leases property to a tenant and promises to keep the parking lot in good repair. However, the corporation neglects this duty, letting potholes exist for long periods of time. These potholes damage one of the tenant’s delivery trucks. The tenant sues the corporation as landlord for a breach of the lease. The shareholders are not liable for the corporation’s breach of the lease.
Example 2 (no protection): A shareholder-employee drives a car to make a sales call for the corporation. That shareholder carelessly causes an accident that seriously injures a pedestrian. The shareholder could be personally liable for that carelessness even though the shareholder was acting on the corporation’s behalf.
How do you keep the liability shield in place? Follow these rules to keep the corporation’s liability shield in place:
1. Do not mix up the corporation’s money with your own. The corporation should have its own bank account.
2. Do not mix up the corporation’s property with your own. List the corporation’s equipment on the corporation’s fixed asset ledger. If the corporation will own a vehicle that has a certificate of title, put the corporation’s name on that certificate. Make sure insurance on corporate property is in the corporation’s name.
3. Do not mix up corporate transactions with your own. If the corporation leases property to a tenant, make sure you sign the lease in the corporation’s name, not your own.
4. Every signature on behalf of the corporation should include three things: the corporation’s name, your signature, and words that show you are signing on behalf of the corporation, such as “Mark Twain, President” or “T.S. Eliot, Authorized Agent.” The signature block should look like this:
[Name of corporation]
By [Officer’s signature]
[Officer title]
5. Document any transactions between the corporation and you or any other shareholder. If the corporation will own equipment previously owned by you, make a list and sign a bill of sale that transfers the title to the corporation. If the corporation borrows money from you, have the corporation sign a promissory note with a stated due date and interest rate (and make sure the board approved the corporate borrowing, if necessary). If the corporation leases a building from you or other shareholders, sign a lease.
Can directors and officers be protected from liability to the corporation for breach of their director and officer duties? Yes. Shareholders have the power to limit some of a director’s and officer’s so-called “fiduciary duties.” These limits are effective only if put into the articles. These limits protect directors and officers against monetary liability only.
What kinds of personal liability do you retain, even with a corporation? The corporate liability shield does not protect you or other shareholders, directors, or officers from all personal liability. You will continue to have personal liability in at least the following significant areas:
• You remain liable for your own personal carelessness that injures someone or destroys property, even if you were acting on behalf of the corporation.
• You will be personally liable for any contracts you make personally, such as your personal guarantee of a bank loan to your corporation. You may even have personal liability under some written corporate contracts if you fail to indicate the representative capacity in which you are signing (see above).
• You are personally responsible for income taxes on your share of corporate distributions, if any.
• If you have authority for payment of corporate taxes, you can be personally liable as a “responsible person” for income tax liabilities for certain state and federal withholding taxes.
• You can be held personally liable for all of the corporation’s obligations if you lose the corporate liability shield. This is more likely to happen, for example, if you comingle the corporation’s funds with your personal funds or otherwise fail to follow the principles described above.
Corporate Tax Matters
Does the corporation pay income tax? Yes, unless the corporation is taxed as an S corporation. If it taxed as an S corporation, the following rules apply. Each shareholder generally reports his or her share of the corporation’s income, loss, deductions, credits, etc., on that shareholder’s tax return. Each shareholder must pay tax regardless of whether the corporation distributed any cash during the year. Your shareholder agreement may require distributions in amounts sufficient to pay these taxes.
Must the corporation obtain a federal employer identification number (EIN)? Yes. The corporation must obtain a federal EIN when it begins to do business, even if it expects to have no employees. Use IRS Form SS-4 to apply for this number.
What federal and state tax filings must the corporation make? You should consult your accountant regarding the necessary income tax filings on behalf of the corporation. Those may include filing with the Michigan Department of Treasury for the Michigan Corporate Income Tax, sales and use tax, and unemployment compensation registration.
Local personal property tax statements. The corporation must file a personal property statement in February of each year in each locality where the corporation has personal property. Appeal deadlines are extremely short (often less than two weeks) and you should carefully review any assessment notices as soon as you receive them.
Other Corporate Business Matters
The name you do business under. If you plan to do business under any name other than the corporation’s exact, complete name (including the “Inc.” at the end), you must file an assumed name certificate with the state of Michigan. The filing is good for five years and the state will send you a notice when refiling is needed to extend the certificate.
You should file the certificate for two reasons. First, the statute requires it. Any name other than the exact, complete name of your corporation is an “assumed name.” For example, if your corporation’s name is “Amalgamated Technology Services, Inc.,” but your website, business cards, stationery, etc., refer only to “Amalgamated Technology Services,” you are doing business under an assumed name and you must file a certificate.
The second reason is that failing to file the certificate creates the possibility of personal liability on the corporation’s employees and owners. This arises from the common-law rule that an agent has personal liability for the agent’s actions on behalf of an undisclosed principal.
Do federal and state securities laws apply? Yes. Shares are “securities” under federal and state securities laws. The corporation or other seller cannot issue, sell, or even offer to sell shares unless the seller makes adequate disclosures to the buyer and registers the securities with federal and state securities agencies. Some securities and securities transactions are exempt from registration but not exempt from disclosure rules.
Buyers may rescind sales that violate these laws and may recover the purchase price plus interest or damages and attorney fees. Violators may be subject to criminal penalties.
Worker’s disability compensation insurance. Certain corporations with employees must have worker’s disability compensation insurance. This insurance may be obtained through a commercial insurance company or, under certain procedures, an employer may be self-insured.
Licensing. Some businesses may need licenses to conduct business. These licenses may restrict certain corporate or shareholder activities.
Other. A variety of other federal and state laws and regulations may apply to your particular corporation’s business activities. You should contact your attorney if you have questions.
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