If you've set up your business as an S corporation, you will have meet to meet many of the same corporate formality requirements that traditional C corporations must abide by. One of the most important of these formalities is holding annual shareholder meetings.

Purpose of the Annual Meeting

The main purpose of the annual shareholder meeting is to elect the corporation's board of directors for the next year. In the case of a small business operating as an S corporation with few shareholders, the directors may well be the shareholders, and the election may indeed be largely a formality. However, in cases where there are larger numbers of shareholders, or, perhaps, disputes regarding control of the business, it's possible that there will need to be a discussion at the annual meeting regarding who will serve as the directors for the coming year.

You can also use annual shareholder meetings to address and take votes on matters other than who will serve as the S corporation's directors. For example, you might want the shareholders to consider and vote on big issues such as whether to try to sell the business in the coming year. More urgent issues, however, may more properly be handled by calling a special shareholders meeting.

Giving Notice of Meetings

The date of the annual meeting usually is fixed in the corporation's bylaws. For this reason, you generally are not required to give shareholders formal notice of the meeting. However, in practice, most corporations do provide reminders to their shareholders. While many S corporations are small and have just a few shareholders who know and work with one another, it is still prudent to make sure all your shareholders have adequate notice. That way, if a shareholder doesn't attend, you'll be in a better position to deal with complaints (or worse, lawsuits) about any decisions that come out of the meeting.

Timing of Meetings

Annual meetings often are scheduled for just after the end of a corporation's fiscal year. This can be a particularly useful time for the shareholders to discuss the corporation's financial performance. While shareholders in many small, closely-held businesses may be routinely discussing financial performance with each other throughout the year, some small businesses may have passive investors who are not in touch with the business's finances on a regular basis. Particularly for those type of investors, the annual meeting can be an important event.

For the sake of efficiency, annual shareholder meetings are often scheduled on the same day as an annual meeting of the corporation's directors. A meeting of the newly-elected directors usually will be held just after the shareholders meeting. Again, if you have a small business where the shareholders are also the directors, an annual directors meeting may be relatively brief and straightforward.

The Quorum Requirement

Votes taken at a shareholders meeting are valid only if a quorum (minimum number) of shareholders is present. The quorum requirement ensures that a minority of shareholders are not able to improperly exercise control over corporation decision-making. The number of shareholders that constitute a quorum is defined by state law. Most states require by default that more than 50% of the corporation's shares be represented at the meeting in order for there to be a quorum. You do often have the option to impose a greater—or lesser—quorum requirement through your corporation's bylaws. However, many states place an absolute minimum requirement that at least one-third of the corporation's shares be represented, which cannot be superceded in your bylaws.

Appearing by Proxy

As an S corporation shareholder, you can appear at an annual meeting "by proxy." This means you can authorize someone else to attend the meeting and vote on your behalf. Like quorum requirements, default rules for how proxy voting works are laid out in each state's corporation laws. You can also create additional proxy voting rules in your bylaws. You typically will have to complete an authorization form in order to have someone vote your shares by proxy.

Make Sure to Keep Meeting Minutes

Part of required corporate formalities is not just holding annual shareholder meetings, but also making sure those meetings are recorded by the corporation's secretary. More specifically, the secretary will create what are called meeting minutes. These are notes of what happened at the meeting, including when and where the meeting took place, who attended, and any significant actions or decisions. The minutes are kept in a corporate records book, which, in turn, should be kept in a safe location at your corporation's place of business.

Penalties for No Annual Meetings or Minutes

Probably the biggest risk for failing to hold annual shareholder meetings, as with failing to follow other corporate formalities, is that your corporation's shareholders may lose limited liability protection. By default, shareholders in an S corporation cannot be held personally liable if, for example, the company fails to pay debts or injures someone. This type of protection traditionally is one of the main reasons small businesses choose to incorporate. However, courts can remove that protection and hold shareholders personally liable if corporate formalities, including the holding of annual shareholder meetings, are not observed.

Similarly, courts expect corporations to follow statutory requirements to keep meeting minutes, and otherwise record important decisions. Again, failure to adhere to this corporate formality could play a part in placing the limited liability of you and your fellow shareholders at risk.

Additional Information

For more information about other corporate formalities, including special shareholder meetings, as well as other information about S corporations, check the S corporation section of Nolo.com.