Business owners generally recognize the need for annual checkups with their physicians, dentists, investment advisers or financial planners. However, many business owners overlook the need for a checkup on the asset which supports their livelihoods — their business. Annual checkups are vital to avoid costly damages, especially for small companies that do not have a legal department to constantly monitor developments.
Corporate Formalities
One of the most important functions of corporations is to shield the individual shareholders from personal liability. This protection may be lost and a court may hold corporate shareholders personally responsible for the company’s liabilities if it finds that the corporation fails to observe certain formalities such as holding annual shareholder meetings, or keeping separate business records. Once a year a corporation needs to assess whether the required meetings have been held and whether records such as minutes for the past year are up-to-date, to make sure that its corporate “shield” is not compromised.
Contracts
On an annual basis, significant contracts should also be reviewed to determine whether such contracts have been affected by any changes in the law or otherwise need to be updated. The types of contracts that should be reviewed include: shareholder agreements, employment agreements, leases, employee manuals, loan and financing agreements, franchise and license agreements, confidentiality agreements, and insurance policies.
If your company hired additional employees during the past year, you need to confirm that such employees signed employment agreements and/or confidentiality agreements. Companies should also evaluate each year whether their existing confidentiality agreements and covenants-not-to-compete with key employees are sufficient to protect their changing intellectual property. For example, in the past year the company may have developed a new data base of customer information that is now accessed on a regular basis by sales people or customer service personnel that previously did not have access to such information. It could be devastating to the company if one of these employees, who has never signed a confidentiality agreement, were to leave the company and begin to use the information competitively against the company.
Patents, Trademarks and Copyrights
During the year, the protection of a company’s intellectual property may have been neglected. Although applications should be filed when first possible, a company should determine at year-end whether it has any products or processes that could be patented, any brand names or slogans that could be trademarked or any literary or artistic works that could be copyrighted. In addition, the company inventories should be updated to include not only “hard” assets, but an inventory of intellectual property assets. Should a company enter an unexpected dispute with a competitor using similar intellectual property, it might be devastating to a company if it has not properly protected its intellectual property rights.
Tax Consequences of Entity
The choice of entity selected by business owners has a substantial impact on the ultimate tax consequences to the business owners. The most tax favorable structure for a business depends on the individual circumstances of each business and each business owner. Business owners need to review their business operations annually, and keep abreast of new changes in the law, to assure that their present structure minimizes their total tax liabilities.
Governing Documents
An annual checkup should include a review of the corporation’s articles of incorporation and bylaws, or in the case of an LLC, the articles of organization and operating agreement. The corporation and LLC should check to see if changes to the company require amendments to the articles of incorporation or articles of organization. Additionally, directors and officers of a corporation should verify that the articles of incorporation provide that the corporation will limit the liability of directors and officers to the maximum extent permissible under Arizona law.
Annual Reports
Arizona corporations and foreign corporations authorized to transact business in the state must file a report with the Arizona Corporation Commission each year. The annual report must be filed annually by the date established by the Corporation Commission. If an annual report is not filed, the corporation’s articles of incorporation or authority to transact business in the state may be revoked. During any period of revocation, officers could potentially be personally liable for any business they transact in the name of the corporation, such as entering a contract on behalf of the corporation. LLCs are not required to file annual reports but should make certain that the articles of organization on file with the Arizona Corporation Commission are updated if required by statute. For example, an amendment to the articles of organization of an LLC would be required if: (i) the LLC is member managed and there is a change in the persons who are members; or (ii) the LLC is manager managed and there is a change in the persons who are managers or the members who own a 20% or greater interest in the LLC.
Corporate Legal Status
At least once a year, Arizona corporations and LLCs and foreign corporations and LLCs doing business in Arizona should verify their legal status with the Arizona Corporation Commission to make sure that they are in good standing and that information such as the principal address and statutory agent are current. Information on corporate status, along with other basic legal information about a corporation, can be obtained via telephone from the Arizona Corporation Commission.
This column is for general information only and does not constitute legal advice. If you have any questions about corporate law, you should consult an attorney. Kurt M. Brueckner, Esq. is a shareholder in the law firm of Titus, Brueckner & Levine, PLC, 8355 E. Hartford Drive, Suite 200, Scottsdale, AZ 480-483-9600.