The Basics of Corporate Resolutions

The Basics of Corporate Organization

There are many ways businesses can organize themselves. In most states, businesses can operate under the following variations:

• Sole proprietorships, where a person "does business as" (DBA)
• General partnerships
• Limited partnerships
• Limited liability companies
• Corporations

Corporate resolutions arise most frequently in the context of corporations. A corporation is a company or group of people authorized to act as a single entity and is recognized as such by law. As this article in Inc. Magazine explains, there are many reasons to incorporate:

"In the eyes of the law, a corporation has many of the same rights and responsibilities as a person. It may buy, sell, and own property; enter into leases and contracts; and bring lawsuits. It pays taxes. It can be prosecuted and punished (often with fines) if it violates the law. The chief advantages are that it can exist indefinitely, beyond the lifetime of any one member or founder, and that it offers its owners the protection of limited personal liability."

Corporations have officers who fill specific offices as stated in the corporate bylaws or charter, including a president, vice president, treasurer, and secretary. Corporations also have a board of directors, who act as the governing body of a corporation. The board of directors is elected by the corporation's stockholders.

In contrast, Limited Liability Companies (LLCs) usually have members or managers. Resolutions are only optional for LLCs. When they are used, it is often to keep a record of company decisions. Resolutions for an LLC will be voted on by the business owners of the LLC, all of whom will be members.

Partnerships typically give general partners the authorization to bind the corporation. In limited partnerships, limited partners may not have the same authority to bind the partnership, but in most instances, partnerships do not need to pass a resolution for the partners to act.

Managers guide the daily operations of the corporation. Management is usually led by a CEO. The management team does not need to have any financial investment in the company.

A board of directors oversees all operations of the corporation. The directors of a corporation are essentially stewards of the enterprise; they are responsible for managing the corporation. If directors are unhappy with the direction of the company, they normally contact the company's CEO for explanation. In some cases, they will replace the CEO or other management figures.

In contrast, shareholders, for the most part, do not have rights to directly manage the company. A shareholder can be an individual or business entity that owns an interest in the corporation. Shares represent a percentage of a company’s value. When a company is profitable, shareholders receive returns on their investments.

Shareholders usually have a direct connection to the corporation through the board of directors, rather than through the CEO. When the shareholders are not satisfied, they may attempt to remove the directors. Although it is to the corporation's benefit for the directors to know the views of the shareholders, under the law they are not required to comply with the wishes of the shareholders.

The roles of shareholders and directors can be confusing for people new to corporate law, but it is essential that you understand the way a corporation functions. Unless specified in the corporate governing documents, a director is not required to be a shareholder, and a shareholder does not have to be a director.

Shareholders are keenly interested in the performance of managers and directors since shareholders want a return on their investment. As the American Bar Association explains, this can at times result in conflicts.

"In addition to profits being contingent upon the success of the directors and managers of the corporation, the interests of management and owners can diverge. For example, a divergence of interests may arise when management must decide whether to use excess cash to pay dividends to shareholders or reinvest the money in the company."

In addition to using resolutions to resolve conflicts about profits, shareholders have also used corporate resolutions to attempt to influence corporate social responsibility.

How Resolutions are Used by Corporations

As outlined above, a corporation is an entity that has multiple layers of responsibility. A corporation exists separately from its shareholders. One of the benefits corporate status confers is corporate personhood, i.e. the corporation being granted many of the same rights given to a person. With these benefits come additional formalities and recordkeeping responsibilities. Making legally binding decisions in a corporation requires corporate resolutions that follow the format approved by each state. Resolutions are filed and kept with the official corporate records.

Resolutions are usually reserved for the biggest decisions a corporation makes. These decisions most often involve:

• something which has an impact on the ownership of the corporation;
• the major financial decisions of the corporation;
• the appointment of new officers and top employees of the corporation; and
• conflicts or disagreements between those involved in the corporation.

By way of example, corporate resolutions are typically required in order for a company to open bank accounts, execute contracts, lease equipment or facilities, and many more situations where the corporation's ownership or directors must be in agreement in order to transact business. Resolutions are also sometimes utilized to solve a disagreement or conflict, such as when the shareholders disagree with the way the corporation is doing business.

Daily business operations do not need to be made by official resolutions, such as:

• ordering office supplies;
• hiring or firing mid-level employees; or
• paying vendors.

The following issues should usually be achieved by corporate resolution.

• Issuance of stock to new shareholders, or existing shareholders
• Purchase of real property or approval of a significant lease
• Authorization of a substantial loan or line of credit
• Federal and state tax elections with consequences for the corporation
• Adoption of stock options or retirement plans
• Changes in key insurance and fringe benefit plans
• Proceedings of shareholder and director meetings

These are all situations which typically call for a resolution by the board of directors or the shareholders. This creates a paper trail of documentation that is helpful for later review by a corporation's officers, the IRS, creditors, banks, or the courts.

The most significant reason that people choose to incorporate is to separate their assets and limit personal liability. However, this benefit can be lost if the corporation is not diligent about following the laws applicable to incorporation. If you do not carefully follow the rules about recordkeeping, separation of finances, holding shareholders' meetings, and adopting resolutions, then a court could wind up piercing the corporate veil, which means the benefits of incorporation would be lost.

Corporate resolutions, therefore, can ensure that the corporation follows the applicable rules. Resolutions are part of the guiding principles of a corporation. They go hand-in-hand with bylaws.

Corporate resolutions are the vehicle by which the decisions are actually made. A corporate resolution formally records any major corporate decisions so that they may be filed with the company's official records. Corporate resolutions help the corporation remain compliant with required corporate formalities.

Technical Guidelines for Valid Corporate Resolutions

When drafting a corporate resolution document, the following elements should be present.

At the top of the page, state the name of the organization and the name of the body making the resolution. For example, the title would say:

"SHAREHOLDERS' CORPORATE RESOLUTION OF SMITH MANUFACTURING, INCORPORATED"

When a resolution is adopted in lieu of a meeting, the title is most often represented by the words “written resolution” in order to distinguish it from resolutions adopted formally at a meeting.

Recitals are simply formal words which indicate the background to the resolution. In a resolution regarding banking, for instance, the resolution begins:

"Whereas, the shareholders of Smith Manufacturing, Inc., recognize the intention of the corporation to obtain a bank account and a line of credit through PNC Bank…"

The recitals explain the nature of the issue leading to the resolution.

The resolutions are the list of things the group has resolved to do. In our example, the resolutions would be:

"We, the shareholders, THEREFORE RESOLVE AS FOLLOWS:

• Smith Manufacturing, Inc., will open an account at PNC Bank.
• Smith Manufacturing, Inc., authorizes Trudy Treasurer to fund the PNC account.
• Smith Manufacturing, Inc., authorizes Trudy Treasurer and Paul President as signatories on the PNC account."

Each separate action will be a separate resolution. Some people prefer to include details regarding the deliberation of the corporate body that led them to vote on the resolutions, but others prefer to only include the resolutions.

The resolution is completed by making an attestation that the information in the resolution is accurate. The resolution will be dated and signed by the corporate signatories.

Remember, the substance of the resolution will vary according to your company's needs. Most corporate resolution forms include options for approving annual budgets, borrowing capital, declaring dividend distributions, and other useful resolutions.

Corporate resolutions do not normally need to be submitted to a state or federal agency. Instead, they should be maintained with the other important documents of the corporations, such as the books and the meeting minutes. If a shareholder wants to review actions taken by the corporation, then the resolutions should be in a place where they are easy to find.

Be sure to review your state's recordkeeping requirements to ensure that you are keeping the records for the proper length of time. When in doubt, do not destroy the corporate resolutions.

It is easy to get confused about the distinction between the minutes of a meeting and the resolutions passed at a meeting. Minutes and resolutions are similar because they both are records of past actions of the corporation. They provide a way to review past decisions, which can then inform the company in the way they manage new developments. However, the minutes serve a different purpose than resolutions.

Minutes are the official recording of the proceeding of a meeting. The minutes describe the decisions made at the meeting. Minutes are prepared after the meeting and they summarize the decisions rendered in a concise form. The meeting minutes take down the substance of the decision made, along with the names of the members present at the meeting, who introduced the resolution, and who voted on it. During the subsequent meeting, the minutes are ratified as correctly describing the actions of the prior meeting.

In contrast, a resolution is the actual decision that the members at the meeting decide to make. The resolution binds the corporation to a specific course of action. The resolution itself contains important details about the business matter, the decision made, plus signatures of members who affirmed the resolution.

Conclusion

To ensure you are acting appropriately when using corporate resolutions, review your corporation's founding documents, such as the articles of incorporation and bylaws. Determine the proper procedure for proposing and voting on resolutions. Use good legal documents that include all the right formalities, with plenty of flexibility to include information pertaining to your corporation and its specific situation.

By observing proper corporate procedure in adopting resolutions, the company will run smoothly and also stay within the bounds of the law.

How to Create Corporate Resolutions

Use our corporate resolution form to create, download, and print your corporate resolutions right now.