DISCLAIMER: This Guide does not provide legal advice or establish an attorney-client relationship between the reader and author. Always consult an attorney regarding your specific situation.
Introduction and How to Use these Resources
With an initial decision in hand to form a C corporation, farmers need to know exactly what it takes to form one. How does a person set up the C corporation? What documents need to be filed and with whom? What should be included in the bylaws? This section is filled with hands-on tools to help guide you through the process of creating and maintaining a C corporation as well as preparing your bylaws.
The Checklist: Creating a C Corporation sketches the basic process a farmer follows to form and organize a C corporation. It is designed to help famers understand the big picture as they comply with the laws and gear their farm for success. Start with the checklist to get a sense of all that will be required.
The Bylaws for Mother Earth Farm, Inc. with Annotations includes the foundational provisions that are particularly important to include in a C corporation’s bylaws. The sample provisions serve as examples of the ways a farm operation organized as a C corporation may want to handle certain situations should they arise. Note that rather than simply adopting someone else’s bylaws, including those provided here, it’s best to take the time to think through the various issues and craft provisions that are best for your particular farm operation. The annotations to the bylaws provide some alternative ideas as well as questions to illicit the best response and result that is specific to your situation. Upon reviewing these bylaws and the annotations, you can take a crack at drafting your own bylaws using the sample provisions as a guide. Or, you can jot down some key notes and take them to an attorney who will then be able to efficiently draft up your bylaws. Either way, Farm Commons advises that you have an attorney familiar with the laws in your state look over your bylaws before they are finalized. This will ensure that your bylaws comply with your state’s corporation statute and that there are no conflicting provisions within them, which will only lead to confusion down the road.
Finally, C corporations are required by law to hold annual meetings and to keep minutes to provide evidence of what happens in case an issue or dispute arises. Annual meetings offer an opportunity for the shareholders to get together to elect the upcoming year’s board of directors, review the financials and strategize. They also help foster open communication and engagement from the owners. The sample Annual Shareholder Meeting Minutes with Annotations included in this section illustrate how straightforward it is to take minutes. You can use these to guide you through the minute-taking process when you’re holding your annual meetings.
Checklist: Creating a Farm Business as a C Corporation
With S Corporation Tax Status Option
This checklist guides farmers who have made the careful decision to establish their farm operation as a C corporation. This checklist sketches the basic process a farmer follows to form and organize a C corporation at the state level. The C corporation entity can help farmers develop clear decision-making procedures, outline roles and responsibilities of the owners, plan an exit strategy and more. It also provides a layer of protection over the owners’ personal assets from the business’s liability. Note that state corporate statutes vary on the specifics of how a C corporation must be organized and operated. Be sure to review your state’s statute carefully. Given that these statutes vary from state to state, Farm Commons highly recommends that you work with an attorney to help you through the process.
Many farm owners who form a C corporation at the state level also want to take advantage of the federal S corporation tax status. So, this checklist also outlines the steps needed to obtain and maintain the S corporation tax status with the IRS. Note that this step is optional. If you do not make the S corporation election, the IRS will treat the entity as a C corporation and the entity itself will have to pay corporate taxes at the federal level. Conversely, with the S corporation tax status, the entity’s income is passed through to the shareholders or business owners for federal tax purposes. Each shareholder reports the business income and pays his or her share of taxes when filing the individual tax return. The S corporation also provides tax advantages related to self-employment income. However, the tax benefits of the S corporation come with a cost. The entity must meet certain criteria to be eligible and must abide by certain formalities to maintain the S corporation tax status. If you choose to make the S corporation election, be sure you meet and maintain the S corporation criteria and abide by the formalities.
This checklist is designed to be used with the other resources provided in the C corporation and S corporation chapters of this Guide (Chapters 5 and 6). It may be helpful to review those chapters first. This checklist and the accompanying explanations are intended to help famers understand the big picture as they comply with the laws and gear their farm for success.
Establish the C Corporation
- Choose the initial board of directors
- Select a registered agent
- Draft and file articles of incorporation
- Create bylaws
- Hold your first board of directors meeting
- Issue stock, create stock certificates and create shareholder agreement, if necessary
- Get an Employer Identification Number (EIN) from the IRS
- Obtain necessary licenses and permits from state and local agencies
Implement Best Practices
- Follow the bylaws
- Allocate assets between personal and business ownership accounts
- Document relationships for personal assets used for farm purposes
- Update websites, brochures, invoices, order forms and other materials with the “C corporation” (or “S corporation”) designation, if required
- Hold annual shareholder and directors meetings
- Keep meeting minutes and maintain records of corporate decisions
- Keep accurate and up-to-date accounting records for tax purposes
- Make note of and follow any annual obligations such as when, where and how to file your annual report or fee with the state
Optional: Elect S Corporation Federal Tax Status
- Elect S corporation tax status with the federal government
- Make note of and follow any annual obligations to maintain the S corporation tax status
Checklist with Explanations
Establish the C Corporation
- Choose the initial board of directors
The board of directors is a collection of one or more people that governs the corporation and makes major policy and financial decisions for the company. For example, the directors authorize the issuance of stock in the company, appoint officers, and approve loans and other significant financial matters. All states require corporations to have a board of directors. Many states permit just one director, which could be fine for a small farm operation. However, it can be beneficial for the business overall to have others offering advice and different perspectives. Many business experts recommend having an odd number of directors and some go further to recommend that five, seven and nine are magic numbers. The odd number prevents deadlock votes and the five through nine range provides a variety of perspectives, yet not too many opinions. Keep in mind that directors will need to abide by a fiduciary duty to the company (i.e., a duty of care and a duty of loyalty). This basically means that they can’t whimsically make decisions; rather, they have to act with diligence and care. It also means they have to act primarily in the interest of the company and not their own interest. To help reinforce this, you should require directors to follow a strict conflict of interest policy that specifies that they cannot vote on a matter that affects their personal interests. For example, a director who is also the president or CEO should not be able to vote on the amount of their salary. Be sure to keep this in mind when deciding whom your initial directors will be.
- Select and appoint a registered agent
A registered agent is the person on file for the public and the government to contact regarding the corporation. For example, the registered agent is the individual who is notified if the corporation becomes a party in a legal action. This is called service of process. A registered agent can be an officer or employee of the company, but is more often a third party such as the corporation’s lawyer or a service provider who takes on this role for a small fee.
- Draft and file the articles of incorporation
The corporation must draft and file articles of incorporation with the state agency that handles entity formation, which is usually the secretary of state office. The articles of incorporation can be drafted either by the business owner with the help of an attorney or entirely by an attorney.
The articles of incorporation are publicly available documents and often include only the basic details about the corporation that are required, such as the corporation name, the name and address of a registered agent, a corporate purpose (the general objectives of the business), and the names and addresses of directors and officers. What is required can vary from state to state. A quick internet search should bring up the website of the state agency that handles this in your state, which will specify the information you need. Many state agencies have an articles of incorporation form on their website that a business can use and adapt for their needs.
Many states also require you to designate the number of authorized shares or stock to be issued. Deciding on the exact amount could be tricky, though many say it’s actually quite arbitrary. The shares are the ownership interests in the company. Let’s say the company authorizes 10 million shares. If there are two owners, each with 50 percent interest, they each get 5 million shares. It’s advisable to consult with an attorney in your state to be sure the number you designate is proper and recommended for your particular farm operation. It could impact how you raise money or get financing in the future.
The articles will also need to include the name of the incorporator. An incorporator is an individual who organizes and arranges for the articles of incorporation to be filed with the secretary of state. The incorporator must verify that all the included information is true and correct, and must sign the articles of incorporation.
The incorporator can be a shareholder, director or officer of the corporation. It is often the lawyer who is handling the formation of the corporation. While the incorporator is distinct from the registered agent, one person may serve as both.
A corporation does not exist until the date its articles of incorporation are filed and then approved by the state agency. Approval can take anywhere from one day to one week from the time of filing. The articles of incorporation form can generally be submitted online, along with the required fee. If there is no form, the articles of incorporation will likely need to be mailed in. Each state charges different fees, which vary from $25 to $1,000. In addition, most states require an annual fee to maintain the corporation, which is generally less than the fee to create the corporation. The initial directors should review the articles together to be sure everything is accurate before filing. Note that the information on the articles of incorporation may be changed at any time by filing amended articles.
- Draft bylaws
In addition to the articles of incorporation, state corporation statutes also require corporations to have bylaws. The bylaws are a private document, or in effect a contract, that sets the ground rules among the shareholders, directors and officers for how the corporation must be governed. They include procedural guidelines for corporate governance (e.g., shareholder meetings, board of directors meetings, etc.). There are two overarching principles for bylaws. First, like any legal document, they should be clear and precise to avoid challenges in interpretation down the road. Second, they should be consistent with all applicable state laws. In effect, any provision in the bylaws that runs counter to a state law will be deemed unenforceable. And, any action made pursuant to an unenforceable provision will be deemed invalid. Having unenforceable provisions and invalid actions is not good business practice for obvious reasons!
Like the articles of incorporation, the bylaws can be drafted by the business owner(s) with the help of an attorney or entirely by an attorney. Keep in mind that state corporation statutes often set specific parameters regarding certain corporate governance matters that are typically included in bylaws, such as when and how shareholders must be informed about annual meetings, items that must be voted on at annual meetings, how voting must take place, restrictions on who can decide what, etc. These details can vary from state to state. So, if you decide to draft your own bylaws, be sure to check your state’s corporation statute or consult with an attorney who is familiar with your state’s statute to ensure that your bylaws are fully in compliance with state law. The bylaws don’t need to be filed with the state, but they must be officially adopted by the board of directors.
- Hold your first organizational meeting with the board of directors
Next, the board of directors should hold an organizational meeting. At this meeting, the directors should first officially adopt the bylaws. Then they should elect the initial officers. The officers are responsible for the day-to-day management of the company. Officer positions include a president or chief executive officer (CEO), a vice president or chief operations officer (COO), a treasurer or chief financial officer (CFO), and a secretary. A director can serve as an officer, and one person can serve multiple offices. Like directors, the officers owe a fiduciary duty to the company (i.e., a duty of care and a duty of loyalty). Be sure to keep this in mind when deciding who the initial officers will be. After the officers are elected, the directors should also officially approve the issuance of shares or stock in the company. In addition, if the corporation will be an S corporation (i.e., elect S corporation federal tax status), the directors should approve the election at this time. Be sure to follow the voting parameters set forth in your bylaws when voting on these matters. Also, written minutes must be kept for this organizational meeting and all meetings held by the board of directors and shareholders to provide evidence of what happened should a dispute or issue ever arise.
- Issue stock to the founding shareholders
Before engaging in any business activity as the corporation, you should issue shares of stock to the founding shareholders. This is the formal process of dividing up the ownership in the company. It is also required by law if you are doing business as a corporation. Issuing stock can be complicated; it could involve adherence with complex securities laws at both the state and federal level. Farm Commons strongly recommends that you have an attorney who is familiar with corporate and securities law handle the stock issuance for you. When you’re ready to issue the actual shares to your founding shareholders, you’ll need to put in writing the following: the initial shareholders’ names and mailing addresses, the number of shares each shareholder will purchase and how each shareholder will pay for their shares (i.e., cash, property or services–also known as “sweat equity”). Keep in mind that most states have a minimum amount of stock that can be issued, so check your state’s corporation statute. Some states require that you file a “notice of stock transaction” with your state’s business agency or secretary of state. This is typically a simple form, but it’s important that you file it if it’s required. Otherwise you risk the state saying that the issuance of shares is invalid.
You also have the option of issuing actual stock certificates. This is no longer required in most states, but shareholders have come to expect it, and it provides another layer of evidence of who owns how many shares. If you issue stock certificates, states generally require that you include on the face of the certificate: the name of the corporation, the state where the corporation was formed, the name and number of shares issued to the shareholder and a signature authenticating the document.
Note also that if you plan on electing S corporation tax status, you can only issue one class of stock, which is generally common stock, meaning one vote per share. This information should be included in your bylaws.
- Create a shareholder agreement if shareholders want one
While shareholder agreements are not required, they can be useful to set forth specific terms that all shareholders must abide by and follow among each other, particularly with respect to the limitations and process for transferring or selling shares to others. Basically, shareholder agreements could set restrictions to prevent unwanted parties or strangers from acquiring shares in the company. In this way, shareholder agreements can be particularly important in closely held corporations where the shares are held by a small group of people and are not offered to the general public. In addition, shareholder agreements can be a useful way to protect minority shareholders who may fear that their voice will be overpowered. For example, the shareholder agreement could require that all shareholders agree on certain decisions. Shareholder agreements also often include procedures for dispute resolution, which can help keep matters out of court.
- Get an Employer Identification Number (EIN) from the IRS
An EIN is the number that the IRS uses to identify the tax accounts of employers and certain business entities like corporations. You can get an EIN immediately by applying online through the IRS website. If you prefer, you can download Form SS-4 on the IRS website and fax your completed form to the service center for your state. They will respond with a return fax in about one week. You will also likely need an EIN to get a bank account for the corporation.
- Obtain necessary licenses and permits from state and local agencies
You’re almost ready to open shop as a corporation. But first, you’ll need to obtain any required licenses and permits for running your farm operation. Depending on your farm operation, this could include a business license with your city (i.e., a tax registration certificate), a seller’s permit from your state or a zoning permit from the local planning board. It may be helpful to ask other local business owners what they did when starting their business, or contact the relevant state and city offices.
Implement Best Practices
- Follow the bylaws
If you go through the work to outline how the business should handle important matters like decisions, taxes and the departure of a member, it’s very important to follow the document. This gives the business legitimacy in court.
- Allocate assets between personal and business ownership accounts
As discussed above, a farm business needs to follow through on creating a corporation by making the division between business and personal. If the farm doesn’t already have a separate bank account, set one up. Farm expenses and payments should only move through the farm account. Of course, if you forget the farm checkbook and use your personal bank card instead, you may pay yourself back.
Next, determine which assets are farm and which are personal. If there are multiple members and each has promised to make an equity investment in the corporation in exchange for stock, each member needs to follow through with his or her promise by officially making the investment. For example, if one member promised to invest $35,000 in cash, then that money needs to be deposited into the corporation’s bank account. If a member promised to invest his or her farm property, then the title of the property needs to be transferred to the corporation.
Overall, a common-sense allocation is probably the best route. This process can be quite simple–there’s no need to detail every feed scoop, hand weeder or trash bin. Making your best guess as to the value of the farm’s various assets and placing them on the farm’s balance sheet is a simple way to document the transfer of assets. If a farm tried to keep all assets personal and leave the farm with nothing, a court would likely not respect the corporation. The allocation must be based in reality and the farm must have enough assets to capitalize the operation.
- Document relationships for personal assets used for farm purposes
If you choose to hold ownership of the land with yourself personally, you should document the new relationship with the corporation. If the farm business uses your property, then the farm business has a lease with you, whether one is written or not. Written documents are generally the better choice, and it can be a very simple one-page outline of basic terms such as rental rate, lease term and renewal procedures. Many individuals choose to lease the farmland for a rate equal to the value of the annual property taxes, but each farm has unique needs.
Now is a good time to discuss our objectives in allocating assets and writing leases. At any point in time, a court should be able to determine which assets are the farm’s and which are personal. This is because the farm’s creditors can go after business assets. Thus, we need to know what they are. The court should also be able to determine exactly how and why assets are used for both personal and business reasons. Your documentation can go a long way towards creating an efficient process. If records are a mess and there is no documentation, a court may decide for itself which assets are personal or business and the farm would lose an opportunity to influence the process.
- Update websites, brochures, invoices, order forms and other materials with the C corporation designation, if required
State statutes typically require that a corporation use the “Inc.” designation in the name of the business. This signals to potential creditors that only business assets are available to satisfy potential judgments against the business. If you don’t like the look of the abbreviation or you’ve already invested in marketing materials, check with your secretary of state’s office about registering a trade name without the letters. In some states, the county register of deeds handles registration of trade names, so you may need to make a few phone calls. For invoices and other official business, it’s best to include the letters after your name.
- Hold your annual shareholder and annual board of directors meetings
State corporation statutes explicitly require that shareholder and board of directors meetings are each held annually. Some states may allow shareholders to approve actions through written consent instead of a meeting in person. This requires that all shareholders sign a document to evidence their agreement. Either way, it’s important that you follow these formalities and either hold meetings or obtain written resolutions in their place. This helps establish the corporation’s legitimacy and preserves the benefits of having an entity.
The board of directors must also meet annually. Board of directors meetings are often held immediately after the annual shareholder meeting where the board of directors is elected for the year. Like the shareholder meetings, board of directors meetings may also be done through consent resolution and written consent, so long as all the relevant details are in writing with signatures of all directors. It may seem silly to follow such formalities, particularly if the farm business has just a few individuals and they are wearing multiple hats, but these formalities are required by law and must be followed to protect the benefits of having an entity.
When holding meetings, be sure to follow the meeting requirements set forth in your bylaws, including having a quorum before voting (the minimum number of shares or people that must be represented for a vote to take place), providing proper notice within the specified time (the invitation to the meeting with precise details) and administering the voting thresholds (e.g., one share, one vote for shareholders and one person, one vote for the board of directors, or whatever your bylaws specify).
- Keep minutes at all meetings and keep records of significant business decisions
Many state corporation statutes require corporations to keep accurate minutes to record key decisions and resolutions of the shareholders and board of directors. While some states do not require this by law, courts in all states will look at the minutes if a dispute or legal mishap arises. The meeting minutes provide evidence that the corporation was acting properly in both how the decision was made and what was or was not decided. The minutes do not have to be elaborate; they just need to have enough detail to offer proof of what was decided and why. Not every routine business decision needs to be documented, but any decisions that require formal board or shareholder approval should be recorded. Types of decisions that should be recorded include any decision made at annual meetings, the issuance of new stock, purchases of real property, approval of long-term leases, authorizations for credit and decisions that involve federal or state tax implications.
- Keep your corporate binder and stock register up to date
The corporation should maintain a binder that includes the articles of incorporation and any amendments, the bylaws and any amendments, the minutes for annual meetings and special meetings, any written resolutions made outside of a meeting (i.e., with unanimous consent) and any additional records of big decisions. Keeping all these documents in one place makes it easier to refer back to something if an issue arises. Again, it also records that the corporation is properly managing its affairs should a lawsuit arise and the court asks for such evidence. The corporation will also need to maintain a stock register. This register must include information like the names of all the shareholders, their addresses, the number of shares held, the date of certificates issued for the shares, any transfers of stock certificates and any cancellation of stock certificates (i.e., by a shareholder who transfers their stock to another). Generally, it’s maintained by the corporation’s secretary.
- Keep accurate and up-to-date accounting records for tax purposes
This includes maintaining an accurate profit and loss statement. Keeping good accounting records throughout the year will help streamline the process of preparing an annual report (which is required in most states and includes financial information) and filing both state and federal taxes.
- Fulfill annual obligations, including filing and paying corporate federal and state taxes, if applicable
Your state will likely require you to file an annual report and an annual fee to maintain your corporation. If you neglect these duties, the state may dissolve your corporation. You will also need to file and pay your corporate taxes. If you choose to be taxed as C corporation with the federal IRS (which is the default),the corporation will need to file IRS form 1120. The corporation will also need to distribute employment and dividend tax forms to employees and shareholders. Talk with your accountant or tax preparer or your secretary of state’s office and the IRS for more information on filing corporate taxes.
Optional: Elect S Corporation Federal Tax Status
- Elect S corporation tax status with the IRS
Electing S corporation tax status for your corporation is quite simple. You will need to fill out and file with the IRS tax Form 2553, “Election by a Small Business Corporation.” The form should be completed up to two months and 15 days
after the beginning of the tax year the election is going to take effect, or at any time during the tax year preceding the tax year it is to take effect. This sounds complicated but the IRS provides examples of how the timing works in the instruction sheet for Form 2553. Farm Commons highly recommends that farmers consult with a tax attorney or accountant before filing these tax forms to be sure the S corporation tax status is the best option.
- Make note of and follow any annual obligations to maintain the S corporation tax status
As an S corporation, you’ll have to file the annual Form 1120S with the IRS. This is not a tax return, as the entity does not itself have to pay income taxes. Rather, this is an informational tax document used to report the corporation’s income and losses as well as any disbursements of profits given to its shareholders (i.e., dividends to shareholders). Again, the entity itself will not have to pay taxes, as the business’s income passes through to the individual shareholders.
In addition, you will have to provide each of the shareholders with a Schedule K-1. The Schedule K-1 is similar to a W-2, the end-of-year wage statement that employees receive from their employers. The Schedule K-1 shows the self- employment income each of the shareholders receives from the company. The corporation must also submit a copy of Schedule K-1 to the IRS for each shareholder. This allows the IRS to be sure that each shareholder is properly reporting any self-employment income he or she receives from the entity that has S corporation tax status.
Farm Commons recommends that you seek expert tax guidance before filing any of the required S corporation tax forms. Be sure to also abide by all the state income tax requirements for your corporation. The S corporation tax status is only relevant for federal income taxes filed with the IRS.
C Corporation Sample Bylaws With Annotations
Mother Earth Farm, Inc. Bylaws1 An Illinois Corporation
Article 1: Shareholders
Section 1: Place of Meetings
Shareholder meetings must be held at the principal office or place of business of the Corporation in the State of Illinois, or any location designated in the notice of meeting.2
1 Bylaws outline how the corporation is to operate or run its business, including procedural guidelines for corporate governance (e.g., shareholder meetings, board of directors meetings, etc.). There are two overarching principles for bylaws. First, like any legal document, they should be clear and precise to avoid interpretation challenges down the road. Second, they should be consistent with all applicable state laws. Any provision in the bylaws that runs counter to a state law will be deemed unenforceable. And, any action made pursuant to an unenforceable provision will be deemed invalid. Having unenforceable provisions and invalid actions is not good business practice for obvious reasons! So it’s essential to follow your state laws. Each state has a corporation statute that requires all corporations to adopt bylaws and specifies what must be included. State corporation statutes often set specific parameters, such as when and how shareholders must be informed about annual meetings, items that must be voted on at annual meetings, how voting must take place and restrictions on who can decide what, etc. These details can vary from state to state. If you decide to draft your own bylaws, be sure to check your state’s corporation statute or consult with an attorney who is familiar with your state’s statute to ensure that your bylaws are fully in compliance with state law. That way, if you follow your bylaws you can rest assured that you are following the law. These bylaws for Mother Earth Farm, Inc. provide a sample of how bylaws look and illustrate the type of issues that are addressed. These bylaws are for an Illinois business. If you use this example as a starting point, be sure to make necessary changes to reflect your state.
2 Shareholder meetings don’t necessarily have to be held inside the state where the corporation is based, nor do they have to take place at the farm or central place of business. While you could set a firm place for all meetings in your bylaws, it’s often preferred to allow some flexibility in case circumstances change. The important thing is that the shareholders get an invitation to the meeting in advance, or receive “notice” as specified in the bylaws, including precisely when and where the meeting will be held. Here, Section 5 sets the notice or meeting invitation requirements.
Section 2: Annual Meetings
The Annual Meeting of Shareholders shall be held on the second Tuesday in February of each year at two o’clock P.M.3
3 Every state requires corporations to hold annual meetings. This is the opportunity for all the shareholders to get together and vote on important items, review the annual report and generally discuss the business affairs or any pressing issues. State corporation statutes often require that specific items are voted on during annual meetings, such as electing the next year’s board of directors. Annual meetings are required by law, so be sure you actually hold them. And, hold it when your bylaws say you will. You don’t necessarily need to specify an exact day or time in your bylaws. Setting a month is fine as long as you properly send out the invitation to your shareholders as specified in your bylaws, here Section 5. When holding annual meetings, be sure to take minutes of what happened, including any decisions or resolutions that were made. See the sample meeting minutes that follow for a guide.
Section 3: Special Meetings
Special meetings of the Shareholders may be called at any time by the Board of Directors of the Corporation, or by the President upon written request of one or more Shareholders holding at least 10 percent of the shares of stock of the Corporation.4 The Shareholders may discuss any business at a special meeting.
4 Special meetings are typically called when urgent matters arise and a major decision needs to be made. This could include a decision to significantly expand, or conversely to sell, the farm operation. It could also involve a significant shift in ownership or a decision to amend the bylaws. The same “notice” requirements must be met to properly inform shareholders of the precise time and place of any special meeting as well as the purpose of calling the urgent meeting.
Section 4: Notice of Meetings
Notice of the time and place of a Shareholder meeting and the purpose for the meeting must be provided in writing no fewer than 10 days and no more than 50 days before the meeting to each Shareholder of record at their mailing address, as listed on the books of the Corporation.5
5 Giving “notice” is the legal speak for sending out an invitation. Basically, the notice or invitation to a meeting must let the shareholders or the board of directors know important details including when, where and the purpose of the meeting. Properly sending out the invitation to a meeting is essential. For example, if a shareholder doesn’t receive the invitation as specified in the bylaws, they can contest what was discussed and all of the actions taken at the meeting can be deemed invalid. This would be a huge waste of time as it would have to be done all over again. The notice must be in writing. This provides a record of it. It’s also a good idea to set a time range for sending out the invitation in your bylaws to allow some flexibility. Here, notice must be given between 10 and 50 days of the meeting, so the invitation can’t be sent before or after this timeframe. The written notice can be mailed, handed out personally or electronically mailed if all individuals agree. Note that including the purpose in the notice or invitation is very important. Some state statutes say that if the purpose is not included in the invitation, the matter can’t be voted or acted on.
Section 5: Waiver of Notice
A Shareholder may waive notice of a meeting by attending the meeting, either in person or by proxy, or by providing a written waiver before or after the meeting. Waiver of notice shall not be deemed if a Shareholder attends a meeting for the express purpose of contesting the notice or contending that the meeting was otherwise not lawfully called or convened.6
6This provision basically says that the notice requirements can be waived. This gives the corporation some flexibility in urgent situations (i.e., if a meeting needs to be called in fewer than 10 days) or if the shareholders don’t really care if they receive such an official invitation. Say all the shareholders are friends and they say, “Hey, I don’t need an official notice mailed to me, just tell me when the meeting is and I’ll be there.” As long as they put this in writing, which can be a simple email, before or after the meeting, you can rest assured that there will be no issue. Also, if an individual shows up to a meeting and doesn’t raise issue about whether or how they got the invitation, then that will be deemed a waiver. This makes sense, as the notice provision ensures that shareholders will learn when and where a meeting is to take place so they can attend. The person who shows up obviously found out about it, so the issue is waived. However, if the shareholder shows up to contest the notice, it is not waived. This gives shareholders the opportunity to lash out in person if they think their interests are being subverted or intentionally sabotaged, which does happen!
Section 6: Quorum
In order to transact business at a Shareholder meeting, there must be a quorum consisting of a majority of the issued and outstanding shares of stock of the Corporation either in person or by proxy.7
7 A quorum is the amount of represented shares that must be present for the meeting to happen. Note that a quorum is not based on a majority of the number of shareholders, but a majority of the shares of the company. Not all shareholders will necessarily hold the same amount of shares. Many state statutes specify a minimum for a quorum, such as a majority of the shares in the company. If this is the case, your bylaws can set the quorum higher (i.e., two-thirds of the shares) but not lower (i.e., one-third of the shares). Without a quorum, any decision made at the meeting is considered invalid as it could reflect the interest of just a small percentage of ownership interest in the company. Say only 10 percent of the company’s shares are represented at a meeting. Allowing this 10 percent to take actions on behalf of the company wouldn’t be in the best interest of the company.
Here, because Mother Earth Farm has just two shareholders who each have 50 percent of the shares, both mom and daughter need to be present for a quorum (i.e., majority of 51 percent).
Section 7: Number of Votes for Each Shareholder
Each Shareholder is entitled to one vote for each share of stock belonging in their name on the books of the Corporation.8
8 Most state statutes require a one share, one vote voting rule, so this restates the law. However, some states allow shareholders to receive fractional shares (e.g., 2.5 shares), which can then be matched with fractional voting power (2.5 votes). Small businesses do not usually deal in fractional shares, so the one share, one vote rule will work well for most farm operations.
Section 8: Proxies
At all Shareholder meetings, every person entitled to vote may authorize another person or persons to act by proxy with respect to their shares by filing a written proxy with the Secretary of the Corporation. A proxy may be revoked at any time before a vote, either by written notice to the Secretary or by oral notice given by the Shareholder at the meeting. The presence of a Shareholder at a meeting who filed a proxy does not constitute a revocation of the proxy. A proxy appointment is valid for 12 months from the filing, unless otherwise indicated in the written proxy form.9
9 A proxy is a written authorization signed by a shareholder (or a shareholder’s power of attorney) giving someone else the power to represent and vote on behalf of the shareholder’s shares. It basically allows someone to stand in for a shareholder at the meeting. The shareholder can specify parameters for how the other person, or proxy holder, should vote. Or, they could simply trust and allow the proxy holder to vote based on his or her own conscience. The proxy counts towards a quorum and represents the shareholder’s votes.
In our example of Mother Earth Farm, if daughter gets sick and signs a written proxy allowing cousin to vote on behalf of her shares, cousin and mom can still make decisions and take a vote because cousin is standing in for daughter’s 50 percent share.
Section 9: Voting
If a quorum is present, a majority vote of the shares entitled to vote and represented at the meeting shall be the act of the corporation.10
10 This basically says that a majority of the shares present at the meeting will have the final say on any matter that’s taken to vote. This can be a bit tricky. Again, the quorum requires that at least a majority of the shares are present at the meeting.
Let’s say for a moment that there are three shareholders: mom has 40 percent, daughter has 35 percent and aunt has 15 percent of the shares. Daughter and aunt attend the meeting as shareholders, but mom doesn’t. There’s a quorum, because daughter and aunt together have 60 percent of the shares. Now, let’s say that daughter and aunt take up the matter of voting on next year’s board of directors. Daughter now represents the majority of shares present at the meeting, as mom’s shares don’t count because mom’s not present. So basically whatever daughter decides is the act of the company. This scenario shows how important it is to attend the meetings or to get a proxy (i.e., someone else to stand in for you).
Section 10: Order of Business
The following order of business shall be observed at all Annual and Special Meetings:
- Roll call
- Proof of notice of meeting
If a quorum is present, the meeting continues with the following order of business:
- Approval of the minutes of previous meetings, unless waived by unanimous consent
- Reports of Board of Directors, if any
- Reports of Officers, if any
- Reports of Committee, if any
- Election of Directors, if necessary
- Unfinished business, if any
- New business, if any11
11 This provision isn’t really necessary, but it can be helpful to have a sort of working agenda of items that must be handled at every meeting, and in what order. It can help ensure all important matters are covered in an efficient manner.
Section 11: List of Shareholders
A complete alphabetical list of the Shareholders of the Corporation entitled to vote at the meeting, including address of and number of shares owned by each Shareholder, must be prepared by the Secretary or other Officer of the Corporation in charge of the Stock Transfer Books. This list shall be kept on file for a period of at least 60 days prior to the meeting at the registered office of the Corporation and must be subject to inspection during usual business hours by any Shareholder. This list shall also be available at all Shareholder meetings and must be open to inspection by any Shareholder at any time during a meeting. Failure to comply with the requirements of this Section will not affect the validity of any action taken at any Shareholder meetings.12
12 Most states’ statutes require the corporation to maintain an alphabetical list of shareholders and to have it readily available for inspection at shareholder meetings. This provides a level of accountability and transparency, which can help ensure that none of the shareholders are wrongly left out or being subverted.
Section 12: Adjournment of Annual Meeting
If a quorum is not present at the Annual Meeting, the Shareholders present, in person or by proxy, may adjourn for a future time agreed upon by a majority of the Shareholders present. Notice of such adjournment must be given to the Shareholders who are not present or represented at the meeting. If a quorum is present, they may adjourn when they see fit and return at a time and day that is agreed upon; no notice of such adjournment must be given.13
13 Adjournment means to suspend the meeting to another time or place. If the quorum is not met, there’s really no point of meeting, as no official action can be taken. This adjournment provision allows the shareholders present to postpone the meeting to a time they agree will be more suitable for all. If this happens, they must send out an invitation to the shareholders who aren’t present in accordance with the notice requirements in Section 5. When there is a quorum, the people who are present at the meeting can decide to adjourn the meeting and agree upon a date and time to meet again without notifying the people who are not present. This provision also allows the shareholders to end a meeting even if matters are not completed so long as they agree to a time and day to return. This is helpful if the meeting runs late, which often happens!
Article 2: Stock
Section 1: Certificates of Stock
The Corporation will issue certificates of stock when shares are fully paid.14 Certificates of stock represent shares in the corporation and must include the following: (1) the name of the corporation and that it is organized under the laws of Illinois; (2) the name of the person who owns the shares (the Shareholder); and (3) the number of shares that the certificate represents. The certificates of stock must be signed by the president and by the secretary and must be attested by the corporate seal. All certificates must be consecutively numbered, and the name of the person owning the shares, the number of shares and the date of issue must be entered into the Corporation’s books.
14 Most states no longer require corporations to issue certificates of stock. However, it is a custom that many corporations still observe. Many shareholders have come to expect paper stock certificates. Issuing them also provides another layer of proof of who has stock or equity ownership in the company. If your state requires certificates of stock, be sure to look up the section on share issuance in your state’s corporation statute and follow the exact requirements.
Section 2: Transfer of Shares
Shareholders may transfer their stock in person or by their attorney upon surrender of the properly endorsed certificate of stock. It is the duty of the Secretary to issue a new certificate to the person entitled to it, to cancel the old certificates and to record the transaction on the share register of the Corporation.15
15 If the corporation issues stock certificates, this provision should be included to specify what happens when the stock is transferred to another person. Basically, the transferring shareholder needs to fill out the endorsement section (usually found on the back of the certificate of stock) and then give the certificate to the secretary of the corporation. It is the secretary’s job to record the transfer in the corporation’s stock transfer books and issue a new certificate to the new shareholder. Most farm operations will have a closely held corporation, which means that the shareholders can’t just transfer the shares to a stranger. The shareholders of a closely held corporation typically enter a separate shareholder agreement that specifies some additional restrictions on how shares may be transferred. In addition, if the corporation elects the S corporation tax status, the transfer of shares is restricted in certain circumstances. If either is the case for your farm operation, be sure to follow the shareholder agreement and the S corporation restrictions. See Article 7 in these bylaws for an example of the type of provisions that should be included if you elect S corporation tax status.
Section 3: Lost, Destroyed or Stolen Shares16
If a Shareholder claims that their certificates of stock have been lost, destroyed or stolen, a new certificate will be issued in the place of the original if the owner: (1) requests a replacement certificate before the corporation has notice that the missing shares have been acquired by a bona fide purchaser; (2) files with the corporation an indemnity bond (no more than twice the value of the shares represented by the certificate) if required by the Board of Directors; and (3) satisfies other reasonable requirements provided under the authority of the Board of Directors.
16 This section discusses how lost, destroyed or stolen certificates of stock can be replaced. Following these procedures helps assure that there will be no double selling of the stock if the lost or stolen stock finds its way into the hands of an innocent purchaser who purchases the stock without any knowledge of its lost or stolen status. Basically, the original shareholder must give the corporation notice before the innocent purchaser records their stock with the secretary, otherwise the shareholder may have to cover any damages incurred to the corporation if stock ownership is contested. This is very unlikely to become an issue in a closely held corporation with only a few shareholders such as Mother Earth Farm, but it is important to include in case something happens to the certificates of stock.
Article 3: Directors17
Section 1: Number, Election and Term of Office
The Corporation is managed by a Board of Directors consisting of two people.18 The number of Directors may be increased or decreased by an amendment to the Bylaws. However, the number of Directors shall never be fewer than two individuals. The Directors shall be elected at the annual Shareholder meeting and shall hold office until the next annual meeting and until their successors have been elected and trained.
17 Most state statutes require a corporation to have a board of directors. The board makes major management decisions for the company. The shareholders elect the members of the board to play this role. The shareholders can always remove directors if they’re not happy with how decisions are being made.
18 Some states require a minimum of three board members while others require just one. Additionally, most states require that directors have a one-year term and require elections at the annual shareholder meeting. The same directors may be reelected each year, but the election formality needs to take place. Be sure to check your state statute to see what is specifically required here.
Section 2: Vacancies
Vacancies in the Board of Directors may be filled by a vote of the remaining Directors.19 The Director fulfilling the vacancy shall serve until the next annual Shareholder meeting.
19 Allowing the remaining directors to fill a vacancy is consistent with the law in most states; however, some states require director vacancies to be filled by a shareholder vote. Again, be sure to check your state statute.
Section 3: Director Meetings and Quorum
An annual meeting of the Board of Directors shall be held immediately after and at the same location as the annual Shareholder meeting. Additionally, special meetings may be called by any Director by giving five days written notice of such meeting to each Director. Notice is not required for any Director who attends the meeting in person or who waives such notice in a writing filed with the Secretary of the Corporation. At all meetings of the Board a majority of the Directors shall constitute a quorum for the transaction of business.20 The act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by these Bylaws. If all Directors are present, a meeting may be held at any time without notice. In the event that the Corporation has only one Director at any time, a single Director shall constitute a quorum.
20 Most state statutes also require the board of directors to have an annual meeting. This provision sets the parameters for notice and a quorum, which is similar to the requirements for shareholder meetings. Note that the quorum for directors is a majority of the number of directors and has nothing to do with the share or stock percentage. This section also allows the board to meet as many times as necessary to deal with corporation issues.
For Mother Earth Farm, it is unlikely that mom and daughter will need to call a formal meeting whenever they want to meet, but to maintain corporate formalities and to ensure liability protection, mom and daughter should be sure to have a formal annual directors meeting.
Section 4: Powers
The business and affairs of the Corporation must be managed by the Directors who may exercise all the powers necessary to run the business.21
21 Again, the board plays the role of
Section 5: Removal
At any Shareholder meeting, any Director (or Directors) may be removed from office, without reason or cause,22 by a majority vote of the present Shareholders. Vacancies will be filled according to Section 2.
22 Most state statutes specify that a director cannot be removed unless there’s a cause, such as illegal activity, unless the bylaws specify otherwise. So if you want to give shareholders the right to remove directors without cause, you need to include this in your bylaws. This gives the shareholders the absolute ability to act if they feel the company is not being run well. After all, the shareholders are the ones who have a financial stake in the company.
Section 6: Compensation23
Directors and members of any committee of the Board of Directors are entitled to a reasonable compensation for their services as determined by resolution of the Board of Directors. A Director may also serve the corporation in any other capacity and receive compensation for that position. Directors must also be provided with reasonable pensions, disability or death benefits, and other benefits or payments to Directors and to their estates, families, dependents or beneficiaries for services rendered to the Corporation by the Directors.24
23 This section includes the generally accepted practice of not paying salaries to directors, but instead paying them for their services (such as the costs for traveling to and attending a meeting). Since mom and daughter will likely be compensated through their roles as officers, and meetings will be held on the farm, they may decide by resolution that directors will not be compensated for their services.
24 Including compensation and benefits for directors is optional. If you include it, it needs to be customized to the benefits that are being offered to the board.
Section 7: Committees25
The Board of Directors may designate one or more committees to report to the Board on any area of corporate operation and performance. Each committee shall consist of at least one member of the Board of Directors. Each committee may exercise any and all powers that are conferred or authorized by the Board of Directors. Matters will be decided by a majority vote of the committee members. The Board of Directors shall have the power to fill vacancies, to change the size of membership and to discharge any committee. Each committee must keep a written record of its acts and proceedings and must submit that record to the Board of Directors at each regular meeting and at any other time as requested by the Board of Directors.
25 Committees are a way for the board to delegate decision-making to smaller groups rather than requiring all members of the board to vote on a matter. This is particularly useful for larger boards that want to divvy up the tasks based on interest or expertise (such as a committee for finances or personnel). State statutes specify that some issues may not be delegated to a committee, such as amendments to the bylaws. For a small corporation like Mother Earth Farm, it is unlikely any committees will be set up. However, including this clause sets up the infrastructure in case more directors come on or if there’s a particular issue that the board decides only one board member needs to be present to make decisions on.
Section 8: Dividends
The Board of Directors has full power to determine whether any, and, if so, what part, of the funds legally available for the payment of dividends will be declared and paid to the Shareholders of the Corporation.26
26 A dividend is when the company hands out or distributes the company’s earnings to shareholders. Dividends are not required and can only be made if the company turns a profit. It’s often preferred to keep the money in the farm operation to spur growth. In these bylaws, it’s up to the directors to decide whether, when and how much of the earnings should be given to the shareholders in the form of dividends. All state corporation statutes require that dividends be distributed based on shares of stock in the corporation.
Here, mom and daughter each have 50 percent stock, so they would split any dividends. If mom had 60 percent stock, she would get 60 percent of the dividend amount.
Article 4: Officers
Section 1: Titles, Election, and Duties
The Board of Directors shall appoint a President, a Vice President, a Treasurer and a Secretary.27 The Directors may also appoint other Officers with titles and duties as determined by the Board of Directors. The duties of the Officers are described in the following sections of this article, by these Bylaws and from time to time as prescribed by the Board of Directors.
27 Most state statutes require corporations to have at least a president and a secretary. This section creates positions for a president, vice president, treasurer and secretary. It is good business practice to divvy up the roles. If your corporation prefers to call the president the chief executive officer (CEO), you can replace the term in the section. The same goes with chief financial officer (CFO) in place of treasurer. This section also gives the board of directors the flexibility to create other officer positions should the need arise.
Section 2: President
The President shall preside at all meetings of the Directors and Shareholders, and shall have general supervision, direction and control of the day-to-day business of the Corporation subject to the control of the Board of Directors.28
28 This clause describes the president’s duties, which include presiding over all meetings of both shareholders and directors, as well as running the day-to-day business of the corporation. There is no state-required definition of what a president does, and wording the clause generally gives the corporation flexibility with regards to what the president can and can’t do. As it’s laid out here, Mom (the corporation’s president) has flexibility to do what needs to be done for the company to succeed day to day. This makes sense for a small farm operation like Mother Earth Farm. It’s important to craft the roles and responsibilities of the officers in a way that’s most suitable for your farm operation.
Section 3: Vice President
The Vice President shall exercise the functions of the President during the President’s absence or inability to fulfill their actions. In addition, the Vice President will have any other duties that are assigned to them by the Board of Directors.29
29 This clause also is designed to allow the vice president’s role to be as flexible as possible.
Section 4: Treasurer
The Treasurer will keep and maintain the financial accounts of the Corporation, including an account of all monies received or disbursed. They will keep adequate and correct books and records of accounts of the properties and business transactions of the Corporation. The Treasurer may endorse on behalf of the Corporation for collection only, checks, notes and other obligations. They must deposit the same and all monies and valuables in the name of, and to the credit of, the Corporation in such banks and depositories as the Board of Directors shall designate.30
30 Generally, the treasurer, or chief financial officer if you prefer, is in charge of all the money flowing in and out of the corporate accounts. This provision provides a level of accountability by requiring that whatever the treasurer receives must be put into the proper corporate account. In addition, the treasurer must keep accurate books and records of all the corporate accounts.
Section 5: Secretary
The Secretary shall keep the minutes of the meetings of Shareholders and Directors, and shall give notice of all such meetings as required in these Bylaws. If the Secretary is not present at a meeting, the Shareholders at the Shareholder meetings or Directors at a Directors meeting shall appoint someone to take the meeting’s minutes. The Secretary shall have custody of the seal of the Corporation and all books, records and papers of the Corporation, except those in the custody of the Treasurer or some other person authorized to have custody and possession thereof by a resolution of the Board of Directors. The Secretary shall also perform any duties that are incidental to her office or are properly required by the Board of Directors.31
31 The secretary is generally in charge of making sure that the notice or invitation to meetings is proper, that the meetings are held in accordance with the bylaws and state law, and that minutes are taken and kept in the corporate binder along with the articles, bylaws and any amendments. Here, the secretary is also in charge of keeping non-financial books, including the stock register. This register must include information like the names of all the shareholders, their addresses, the number of shares held, the date of certificates issued for the shares, any transfers of stock certificates and any cancellation of stock certificates (i.e., by a shareholder who transfers their stock to another). The secretary’s job can be very detail oriented, including being sure that deadlines for sending meeting invitations are not missed. Some of the secretary’s responsibilities can be delegated to other directors or employees by resolution of the board of directors.
Section 6: Compensation
The salaries of all Officers shall be fixed by the Board of Directors. If an individual serves as a Director and an Officer, she may receive compensation for both positions. No director or officer may vote on his or her own salary.32
32 Both directors and officers may receive compensation for their service in the role. Here, the board of directors has the authority to determine whether and how much compensation to pay the officers and directors. Note that all states require directors and officers to abide by a “fiduciary duty.” This is a legal term that says that the director or officer must act solely in another party’s interest, which here is the corporation’s interest. A director has a “conflict of interest” if they can vote on their own salary. They may personally have an interest in a huge bonus, but that would not be in the interest of the corporation. It’s good practice to have a clear conflict of interest policy that all directors and officers abide by. Adding a voting restriction in the compensation provision of the bylaws serves as a reminder of the director’s fiduciary duty to act first and foremost in the interest of the corporation.
Section 7: Appointment, Removal and Vacancies
Each Officer must serve for the term of one year33 and until their successor is appointed and trained. However, an Officer may be removed by the Board of Directors at any time with or without cause and with or without hearing or notice of hearing.34 Vacancies of an Officer by reason of death, resignation or other cause shall be filled by the Board of Directors.
33 It’s up to you to decide how long you want officers to serve in their role. Here, it’s one year.
34 The bylaws should specify who has the authority to appoint and dismiss officers and how this process takes place. Here, the authority is in the hands of the board of directors. Of note, even though dismissal can be “without cause,” the board of directors must still be careful to abide by state and federal employment law. For example, dismissal of an officer cannot be based on discriminatory reasons.
Article 5: Indemnification
Section 1: Indemnification and Reimbursement
The Corporation must indemnify each of its Directors, Officers and employees (and any executor, administrator and heir of a Director, Officer or employee) whether or not currently in service against all reasonable expenses incurred by them in connection with the defense of any litigation they are a party to because they are or were a Director, Officer or employee of the Corporation. The individual will not have a right to reimbursement if the matter involves negligence or misconduct in the performance of their duties, or the individual was faulty in the performance of their duty as Director, Officer or employee by reason of willful misconduct, bad faith, gross negligence or reckless disregard for the duties of their position. The right to indemnity also applies to court-approved settlements and compromises.35
35 An indemnification provision is simply a promise by the other party to cover your losses if he or she does something that causes you harm or causes a third party to sue you. Indemnification provisions can vary quite a bit. Here, this indemnification clause means that if someone sues a director, officer or employee of the company for something they did on behalf of the corporation, the corporation has to pay to defend that lawsuit. The caveat is that if the action is attributed to the negligence or intentional bad acts of the director, officer or employee, the corporation does not have to pay to defend the lawsuit. In general, if the individual was acting in good faith and with the corporation’s best interests in mind, the corporation will need to indemnify or pay them for any legal costs incurred. A corporation should consider carrying insurance for this–without insurance, the business probably can’t afford to follow through on this provision. Farm liability insurance may or may not provide this coverage. A commercial policy might be necessary.
Article 6: Amendments36
Section 1: By Shareholders
New Bylaws may be adopted and any Bylaws may be amended, altered or repealed by the Shareholders at any Shareholder meeting, provided written notice of such proposed action shall have been given in the call for such meeting.
Section 2: By Directors
Except as otherwise provided by law, the Directors may adopt, amend or repeal these Bylaws.
36 It’s important to include explicit provisions for how the bylaws can be amended. Many state statutes speak to these as well, so be sure to check any specific requirements in your state’s statute. In these bylaws, either the shareholders or the directors can amend the bylaws by a majority vote at a meeting (i.e., one share, one vote for shareholders and one person, one vote for directors). You could require a different voting threshold such as a supermajority (three-quarter approval) or unanimous consent to amend the bylaws or any other “big” decision that needs to be made, such as selling the company or closing the business. It’s up to you. Just be sure to check your state’s statute to ensure whatever you decide is in line with the laws of your state.
This certifies that the foregoing is a true and correct copy of the Bylaws of Mother Earth Farm, Inc., and that these Bylaws were duly adopted by the Board of Directors of the Corporation on the date set forth below.
Signature ___________________________________, Secretary
Sample Annual Shareholder Meeting Minutes with Annotations
Annual Shareholder Meeting Minutes for Mother Earth Farm, Inc
An annual shareholder meeting was held on February 11, 2015, at 2 p.m. at the Mother Earth Farm, Inc. office in Illini, Illinois,1 for the purpose of electing directors of the corporation for next year’s term, discussing the company’s financial performance, addressing any amendments to the bylaws, and for any other relevant business matter that arose.2
1 The place, time and date information needs to be in line with whatever is specified in the company’s bylaws. For Mother Earth Farm Inc., the bylaws explicitly say that the meeting will be held on the second Tuesday of February at 2 p.m. Your bylaws don’t necessarily have to be as precise. Most state statutes require that the annual meeting be held at a date, time and place set forth in the bylaws, or be determined in accordance with the bylaws. For example, the bylaws could simply specify a month and a place and require that the precise time be determined within 30 days of the meeting date. Whatever the case, be sure that you follow what your bylaws say and report the actual date, time, place and purpose of the actual meeting in your minutes.
2 Most states require that director elections are held at the annual meeting. Any other matter that is discussed is up to you. It’s helpful to state the purpose at the beginning of the minutes as it makes it easier to recall what was covered if you’re searching for something in particular.
Mom Farmer acted as chairperson and Daughter Farmer acted as secretary of the meeting.3
3 Mom is the president and the bylaws say that the president presides over shareholder meetings. Daughter is the secretary of the corporation, so she’s the one that handles administrative aspects, including the minutes.
The secretary announced that all the attendees were given proper notification of the meeting’s time, place and purpose as required by the bylaws, or that such notice had been waived. Copies of the written notice and any written waivers are attached to these minutes.4
4 State statutes require that shareholders are told in advance the date, time and place of the annual meeting as well as the purpose, or what will be covered, so that they can plan and prepare. This invitation to the meeting–or “notice” in legal speak–must be in writing and must follow the timing protocol that is set forth in your bylaws. For example, if your bylaws say that you must notify shareholders of the annual meeting 30 days prior to the meeting date, be sure to do so. Your bylaws can also specify how such notice can be waived. For example, some bylaws say that if a shareholder shows up and didn’t actually receive a written announcement about the meeting, the notice requirement is waived (unless they specifically came to raise issue about improper notice). This makes sense, as the point of requiring written notice is to be sure shareholders know about the meeting. If they show up, they obviously know about it. As for providing shareholders advanced notice about the purpose of the meeting, it’s generally sufficient to attach an agenda or to simply provide some bullet points on topics to be covered along with the written notice announcing the meeting time and place. You may also want to include a catch-all statement like “any other relevant business matter that may arise.” This allows other matters to be discussed if they spontaneously arise. So basically, this section in the minutes states the notice and waiver requirements in the bylaws were followed. It is also good practice to include copies of the written notice or waivers as they provide a safeguard if a shareholder later down the road contests that they weren’t given proper written notice.
The secretary announced that an alphabetical list of the names and number of shares held by all shareholders was available at the meeting for any of the present parties to inspect.5
The secretary announced that the following shareholders, proxy holders and shares were present and constituted a quorum of the shareholders:6
|Name||Number of Shares|
5 Most state statutes require that an alphabetical list of the shareholders is available for inspection at the annual meeting. This is also required in the Mother Earth Farm bylaws. Including a statement about it in the minutes is good practice.
6 This is where you list each shareholder and the number of shares they have. The bylaws will specify what a quorum is, or how many shareholders need to be present for a vote to take place. The Mother Earth Farm, Inc. bylaws say that a quorum is a majority of the voting shares. Since mom and daughter both own 50 percent of the 100 shares of Mother Earth Farm, Inc., both need to be present to meet the quorum. If a proxy was used (i.e., someone standing in for either mom or daughter), be sure to include a sentence after this list that announces that a copy of the written proxy is attached to the meeting minutes.
The secretary announced that the following non-shareholder individuals were also present at the meeting:7
7 This is where you list non-shareholders who were present at the meeting. This could include employees of the company who have something to report, or experts such as lawyers or accountants to advise on legal or financial matters.
The secretary announced that the minutes of the annual shareholder meeting held on February 12, 2014, were distributed at the meeting. The previous meeting’s minutes were approved by all of the shareholders in attendance.8
8 It is customary to approve the previous meeting’s minutes as the first matter of business at a meeting. While it is not legally necessary, it’s a good way to remind shareholders of the issues that came up the year before.
The president announced that the next item of business was the election of the board of directors for another one-year term. The shareholders nominated Mom and Daughter. Mom made a motion to vote on the nominations, and Daughter seconded the motion.9 After a majority vote, the secretary declared that both Mom and Daughter were elected to serve on the board of directors for an additional year.10
9 Making a “motion” and “seconding the motion” is a customary formality in corporate meetings. Basically, any official action or vote that is to be taken at a meeting requires at least two people to agree. The first “moves” or “makes a motion” for the vote, and the second person “seconds” the motion. Then the vote can take place. This helps assure that only relevant and significant matters go to a vote. Here, it seems silly given there are only two shareholders. However, it’s good business practice to follow these customary formalities.
10 Since Mother Earth Farm, Inc. only has two shareholders who are also the only board members, officially voting on this matter each year may seem like a waste of time. However, it’s important to follow the formality and to report it in the minutes since most states require director elections to be held at annual meetings.
The president announced that the next item of business was the financial performance of the company. The president presented the annual report, and a printed version of the report was attached to the end of the minutes.11 Joan Smith, the accountant, reported that based on the findings in the annual report and her review of the company’s financial statements, the company was doing well financially.
11 If any reports are presented at the meeting, be sure to attach them to the minutes. Again, this serves to track what information was presented in case a dispute arises. Of note, most states require that a corporation prepares and files an annual report, which reports on the corporation’s activities throughout the preceding year and provides a summary of the financial performance. Here, the accountant attended the annual meeting to report on the financial performance. This is not at all necessary. However, reviewing your financial performance annually with an accountant can be a helpful exercise. Doing this at an annual meeting ensures that all shareholders have the opportunity to directly hear the expert advice and any tips for financial improvement.
Mom then requested that the annual meeting be held in January instead of February. She presented an amendment to the bylaws to make this change and made a motion to vote on the matter. Daughter seconded the motion. After a majority vote of the shareholders in attendance, an amendment to the bylaws was adopted stating that annual meetings will now be held on the second Tuesday of January.12
12 Electing the board of directors may be the only and final order of business, as it’s really the only matter that is legally required to be handled at an annual meeting. However, consider the annual meeting as an opportunity to discuss and handle any new or unfinished business matters. One example is an amendment to the bylaws. The Mother Earth Farm, Inc. bylaws require unanimous consent for an amendment. The bylaws also require that a proposed amendment to the bylaws be announced before the meeting, or included in the official written notice. Be sure to follow your bylaws in such situations. Here, both Mom and Daughter agree to changing the meeting time. Be sure to attach the amendment to the meetings and follow up by formally amending the bylaws accordingly and including a new copy of your amended bylaws in your corporate binder together with all your meeting minutes.
Since there was no further business to come before the meeting, on motion duly made by Mom and seconded by Daughter, the meeting was adjourned.13
Daughter Farmer, Secretary
13 If there is no further business discussed, the meeting can be adjourned. Again, customarily, this official action requires two people to agree by making a motion and seconding the motion.