What is a Corporate Resolution? Things to Know About This Legal Document
- January 7, 2021
- 6 min read
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The process behind many of the big decisions that drive large corporate actions is something of a mystery to many Americans. They may imagine a complex negotiation process and huge stacks of legal documents outlining any major or minor decision.
In reality, most big companies simply outline their decisions in documents called corporate resolutions, then sign those documents when most of them are in agreement.
While this sounds simple on its face, corporate resolutions do have a few complicating factors you need to be aware of before creating your own corporate resolution documents. Let’s break down these forms in much more detail.
As you can probably guess from its name, a corporate resolution is a kind of legal document that’s written by a corporate Board of Directors. Its purpose is to detail a specific kind of (legally binding) corporate action.
The “Board of Directors” for a company can best be thought of as its governing body. They operate on behalf of shareholder sentiments and employee concerns. The responsibilities of a board of directors include:
- Setting various policies for a company
- Appointing executives for the company
- Giving oversight or direction for the corporation as a whole
A corporate resolution serves as a kind of binding mandate or decision that offers rules, goals, and a framework for future actions.
Put even more simply, every business must make regular decisions via its Board of Directors. When a Board of Directors makes a decision, it’s put in writing. That’s a corporate resolution.
Like any other kind of binding document, a corporate resolution can outline various actions or decisions made by a Board of Directors previously, as well as outline any future behavior or decisions.
For example, corporate resolutions can be used to:
- Establish a business as an independent legal entity
- Decide on a new company direction
- Outline share distribution for shareholders and company executives
- Establish new corporate policies for all management to follow
- Dictate how resources will be distributed
- Dictating safety rules for employees and customers
Most corporate resolutions are recorded in “board meeting minutes” or records of what was spoken of and decided upon at every Board of Directors meeting.
A corporate resolution works since the Board of Directors must (usually) unanimously agree on its provisions and specifications before it comes into action. Since the Board of Directors acts as the collective leader for a company, these mandates must then be fulfilled or followed.
Perhaps more importantly, corporate resolutions act as paper trails for any decisions made by company executives. This is important in the event that a company is reviewed by certain regulators like the IRS (Internal Revenue Service), or even their shareholders or other corporate officers.
Like the U.S. Constitution is a paper version of the binding legal standards and rights to which we all agree as citizens, corporate resolutions serve as paper versions of agreements made by the Board of Directors.
Companies need to use corporate resolutions because they have to make decisions!
In a way, any decision made by the Board of Directors isn’t really ironclad or legitimate unless it’s put in writing. That’s because people can misinterpret things, spread misinformation either by accident or on purpose, and so on unless there is a single shared document to refer to later.
Corporate resolutions can hold a company’s Board of Directors accountable for their actions, as well as prove to the IRS and other regulatory bodies that a company is acting according to its responsibilities/shareholder sentiments.
More importantly, corporations are treated as distinct legal entities from their owners or executives. This means that they have separate liability from their owners.
For this liability to be maintained (which protects owners and executives from bankruptcy and other financial and legal consequences for a company’s operation), the corporation has to act separately continually through all its dealings. This is called the “corporate veil” or “corporate shield.”
A corporate resolution can help to show that the company acts as a legally independent entity, even if, in reality, people comprising a Board of Directors made the decisions overall.
Furthermore, corporate resolutions are required by law for both C and S corporations (classifications of corporations according to their sizes and other attributes).
Because company boards of directors make tons of decisions every year, there are lots of different types of corporate resolutions. Here are some examples:
- One corporate resolution might outline various responsibilities or authorized actions by corporate officers. For instance, such a resolution could detail which officers are authorized to open new bank accounts, write checks for the company, hire and fire employees, and so on
- Another corporate resolution might dictate any changes to a company’s dividend distribution policy to shareholders. This affects directly the profits and shares that shareholders might receive every quarter or year (dividends being stock payouts in cash to shareholders as rewards for previous investment)
- Yet another corporate resolution might authorize the Board of Directors or certain corporate officers to purchase new real estate for the purposes of company expansion, not personal gain
- Lots of corporate resolutions are utilized to apply for loans or credit, as these actions can affect the company overall rather than just a single corporate member
As you can see, corporate resolutions are versatile tools that companies will use for any major decision that can affect their Board of Directors, shareholders, or the company is a distinct legal entity. Since corporate resolutions are so versatile, they’re common to many Board meetings and a company may enact many of them throughout a given year.
Regardless of a resolution’s specific items, there are lots of things that any corporate resolution form has to include for it to be legitimate. These include:
- The date the resolution was created and, if applicable, the effective date for any of its provisions
- The state and any applicable laws under which the corporation was formed and is currently acting
- All of the signatures from any officers that are a part of the Board of Directors or otherwise designated to sign such resolutions. Examples include the Board’s chairperson
- The title of the corporate resolution. This usually outlines its purpose or goal in broad strokes
- A phrase near the bottom of the resolution that states that said resolution has the agreement of all board members or at least a majority
- Furthermore, most corporate resolutions will include certain language. For example, “whereas” statements are used to indicate the intentions of the Board of Directors when creating a given resolution. “Therefore” or “resolved” are used before specifying a certain action to be taken
Corporate resolutions can be created by setting an agenda for a Board of Directors meeting, and ensuring that every board member understands what will take place during said meeting.
At any given Board of Directors meeting, a resolution in its entirety, or certain items included within the resolution could be brought up and discussed. After enough discussion, a board can vote on a resolution and votes may be recorded by the chairperson or another designated official.
Once a corporate resolution is agreed-upon and signed by either all of the members of a board or a majority, the “minutes of the meeting” must be recorded. The resolution must be included in the minutes in order to serve as a legal record of the meeting and its outcome.
Alongside corporate resolutions, shareholders can also create resolutions of their own. In contrast, shareholder resolutions are usually created at annual meetings for the corporation, as shareholders don’t usually have as much interaction or say over the quarter-to-quarter operations for a company.
In the event that a corporation’s stock is publicly held, any shareholder resolution process must be regulated by the SEC or Securities and Exchange Commission.
Note that shareholder resolutions are non-binding. This means that corporate boards in charge of companies don’t have to do anything to enact said resolutions.
In general, shareholder resolutions are presented more as collective requests or shows of intent for a board to consider. Activist groups with goals for environmental or ethical concerns may utilize these to start a conversation with company boards of directors.
Overall, corporate resolutions aren’t as complex as they may initially seem. In fact, they’re a normal part of daily business for any large corporation’s executives or Board of Directors.
However, it’s important that you know how to utilize corporate resolutions, and how to craft them correctly, so you can protect your company from any legal fallout and so you can enact decisions for your company effectively.
Looking for more business resources? Check out Seek Capital’s small business funding options or our blog for more helpful business best practices and info!
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