M E M O R A N D U M

If your Company was incorporated under the Connecticut Stock Corporation Act, the law mandates that a corporation follow certain practices in order to remain in good standing in the State. The purpose of this memorandum is to highlight the minimum "must do" corporate actions and filings required to maintain the Corporation's good standing and to assure that the Corporation remains an entity separate from the shareholders to preserve the shareholders' limited liability for corporate obligations.

t should be emphasized that this memorandum deals only with requirements under Connecticut's Stock Corporation Act. Connecticut has many other laws which regulate business activities, deal with the sale of securities, and impose taxes on corporations, as does the federal government (consult your CPA). Also, should the Corporation conduct business in another state, it may be subject to the laws of the state (consult your attorney). Hence, this memorandum is limited in scope, as noted above.

With this reservation in mind, set forth below are the basic year to year corporate formalities required under the Stock Corporation Act. The act contains many other provisions pertaining to such things as corporate powers, capital structure, and fundamental changes, like an amendment to the Certificate of Incorporation or a merger with another corporation, but these additional provisions are beyond the scope of this memorandum.

 1.    1. Biennial Reports

Once the Corporation's Organization and First Biennial Report has been filed, the Corporation is required to file subsequent biennial reports with the Secretary of the State of Connecticut on or before the last day of the month, every other year, in which the anniversary of the filing of the Certificate of Incorporation occurs. This report must contain the following information:

  (a)   Name of the Corporation;

  (b)   Address of its principal office; and

  (c)   The names and respective residence and business addresses of the directors and officers.

The biennial report must be accompanied by a filing fee, and it must be signed by an officer of the Corporation.

About a month before the biennial report is due, the Secretary of the State should mail a form to the Corporation for use in filing, but failure of the Corporation to receive the form does not relieve it of the filing requirements.

Failure to file a biennial report on or before the due date will cause the Corporation to be in default until the report is filed. There is an additional filing fee for such a late filing. If the Corporation should ever be in default of filing two successive biennial reports, the statute requires the Secretary of the State to file a certificate of dissolution by forfeiture for the Corporation and send notice of the dissolution to the Corporation. Failure to receive the notice does not affect the dissolution. Although the Corporation may be reinstated within a certain time, any obligations taken on during the period of dissolution are personal obligations of the board of directors.

 2.   Statutory Agent for Service

Upon the filing of the Certificate of Incorporation, the Corporation appoints a Statutory Agent upon whom process may be served in a lawsuit against the Corporation. The Corporation must maintain a statutory agent for service in Connecticut. If the person now appointed dies, moves from the State, resigns, or is removed by the Corporation, the Corporation must file with the Secretary of the State, an appointment of another Statutory Agent for Service. The new Statutory Agent for Service may be either (a) a natural person who is a resident of Connecticut or (b) a domestic corporation, or (c) any foreign corporation which has procured a certificate of authority to transact business in Connecticut. A form is available for this purpose. The form must be signed by an officer of the Corporation and by the Statutory Agent for Service. There is a filing fee to the Secretary of State's Office.

Failure to maintain a Statutory Agent for Service may also lead to dissolution of the Corporation by forfeiture if the Secretary of the State becomes aware of the deficiency and a new statutory agent is not appointed within three months.

 3.   Changes in Officers and/or Directors

Any change between biennial filings in the make up of the officers or directors of the Corporation must be reported to the Secretary of the State. The form used for this notice must be signed by both the President (or Vice President) and the Secretary. There is a filing fee to the Secretary of State's Office.

 4.   Annual Meeting of Shareholders

An annual meeting of shareholders of the Corporation is required to be held, as provided in the By-laws. The purpose of the annual meeting of shareholders is to elect (or re-elect) the directors for the ensuing year and to attend to any other matters appropriate for shareholder action.

The statute provides that in lieu of the annual meeting (as well as other shareholders' meetings) shareholders actions may be taken by written consents. Whether this becomes a useful alternative is normally dependent upon the number of shareholders whose consents are to be sought.

There is no statutory penalty for failure to hold an annual meeting, and the directors elected at the last meeting will continue to serve until their successors are named. However, failure to hold the annual meeting is evidence that the corporation entity is being disregarded by the owners. The potential consequences of such omissions are discussed below.

 5.   Meetings of Directors

It is good corporate practice to follow the annual meeting of shareholders with a meeting of the newly elected or re-elected directors. This meeting should be used to elect or re-elect the officers of the Corporation for the coming year and to implement any directives of the shareholders. Meetings of directors should also be held as often as may be required to authorize or ratify major corporate actions. Any meeting of the directors may be dispensed with if consents of the actions taken (by resolutions) are signed by all of the directors.

The absence of formal proceedings of directors to authorize or ratify corporate actions is an additional factor in determining if the corporate entity is being disregarded.

 6.   Management

The statutes prescribe that each Connecticut corporation elect at least a president and a secretary (who must be different persons). Other officers may also be elected.

The day-to-day affairs of the Corporation are managed by the officers, but the statutes require that the business, property and affairs of the corporation be managed by or under the direction of its Board of Directors. Hence, even where the officers, directors, and shareholders are the same persons, it is essential to observe the three organs of corporate management, each with its own role. Reference to the By-laws will be of assistance here.

 7.   Books and records

A Connecticut corporation is required to maintain correct and complete books and records of accounts and keep minutes (or consents) of its directors and shareholders proceedings. A balance sheet and profit and loss statement are required to be prepared each year, with a copy mailed to each shareholder and another copy retained for 10 years at the Corporation's principal office.

A Connecticut corporation is also required to keep a record of the number and par value, if any, of the shares it issues and of the consideration received for the shares. When a shareholder has fully paid for his shares, he is entitled to receive a stock certificate representing the shares.

Once again, failure to keep the required books and records, while carrying no direct penalty is evidence that the corporate owners are disregarding the corporate entity.

 8.  Signing documents in a corporate capacity

The Corporation will be making commitments which will require that documents be executed on behalf of the Corporation. While not a feature of the Stock Corporation Act, the courts and accepted business practices have come to recognize whether a commitment is made in a corporate, as opposed to an individual, capacity by the way the parties to the document are expressed. The Corporation's name should always appear as the party, or the commitment should be made on the Corporation's letterhead. On the signature line, the preferable practice is to name the Corporation and have an officer sign on a line below, prefaced by "By" and with his or her title indicated. Thus:

In that way, the other party to the transaction is clearly placed on notice that he is dealing with a corporation, not with the person who signs even though that person may be the sole shareholder, sole director, and the president of the corporation.

If the foregoing practices are followed, the Corporation will remain in good standing in Connecticut and avoid penalties. In addition, the possibility of a shareholders's being held liable for an obligation of the Corporation will be reduced appreciably. One of the purposes of incorporating is to limit the liability of the shareholders to the amount they have invested in their corporation. By failing to follow the practices outlined above, a corporation's owner may be exposed to personal liability for claims made against the corporation. This is sometimes called "piercing the corporate veil". Courts have applied this doctrine when owners of a corporation have failed to maintain the corporation as an entity separate from the shareholders. While failure to follow the simple practices outlined in this memorandum will not automatically result in personal liability for corporate obligations, it is evidence that the corporate entity should be disregarded and the individual owners held liable. Put simple, if the owners of a corporation do not bother to treat their corporation like it really exists, the courts will not feel compelled to either.