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Does a Startup Entity with No Employees Really Need a Formal Corporate Structure?

September 13, 2015 david.horne

Q: I’m a one hundred percent shareholder and the only director of my startup at the moment. Do I need to go through all this? The corporate formalities of meetings of just me, the officers, the appointment of the officers if it’s just me, if I’m using a lease term, moving my office, getting a bigger space, do I have to have a board meeting and sit there and personally approve my own actions?

A: Yes. Instead of having a meeting, you simply sign a written consent that says in your capacity as director or sole director, I approve this transaction: This lease, this loan agreement, whatever the action is. The documentation can be relatively streamlined in terms of the fact that you don’t have to have a notice of a meeting and minutes of a meeting, but there has to be a written action signed in your capacity as sole director, saying that the contract or the transaction is approved.

The fact of the matter is that if you’re leasing an office or getting a bank account, somewhere in the package of documents from, for instance the landlord or the bank, is going to be a set of resolutions that are for adoption by the board of directors of your company. So, you’re going to be signing a statement that says that the board of directors of your company has, in fact, approved these resolutions. Often this is one of many forms that are given to a business owner to sign in connection with either lease or loan, or some other transaction. The sole business owner is actually signing something certifying that the board has, in fact, approved something. It’s important for the company to have a record that that was approved.

The situation in some ways is even worse when you have more than one member of the board, because you can have an officer signing, for instance, a loan agreement or a lease, and the officer will be certifying that the board has approved something. So, you need to be sure that the board, in fact, has approved it, and that there is a record of that approval.

Another thing to keep in mind is that board meetings can be held on the telephone; they don’t have to be in person as long as everybody can hear each other. It’s also good practice, and it’s very important as the company grows and you start to have multiple shareholders and you’re likely to have more than one board member, you want to be communicating with all of the key constituencies within the company. But, when you’re just the one founder, who is the sole board member, shareholder and sole director, there is a minimum level of process and documentation of process that still needs to be followed in order to provide the necessary legal authorization for certain matters and to protect your personal assets as sole shareholder by showing that you followed these corporate steps, and you didn’t simply sign you name without even mentioning the company name, or without having gotten board approval that is required in that situation.

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