Best practices for operating a corporation: ultra vires acts

Tuesday’s daily focus: small business/corporate

We have been discussing the best practices for successfully operating your corporation, including having annual meetings, keeping minutes, filing annual reports, and keeping separate books and accounts from the shareholder(s).

Now, let’s look at the difference between a corporation’s actions and the actions of its shareholders, directors, and officers – and what happens if someone crosses over the line.

A corporation is a separate legal entity, so it can act on its own. Of course, it actually acts through its shareholders, directors, and officers. But, the corporation’s decision to act is regarded as the corporation’s action. So, the directors and officers of a corporation have to carry out the corporation’s decisions.

If a director or officer goes beyond what the corporation has decided to do, the director or officer has exceeded his/her authority. The legal term for this kind of stepping over the line is an ultra vires act. A corporation should not be liable for an ultra vires action of a director or officer.

The key is to make sure that the directors and officers are always acting within the scope of what the corporation is directing them to do, and not vice versa.

How a lawyer can help you: since a corporation can only act through human beings who serve as its officers and directors, it is important that corporate resolutions to act are appropriately documented. Your attorney can help to make sure that corporate records are kept to document the corporation’s resolutions. It is also important that the corporation’s officers and directors adhere to the corporation’s resolutions, and not go beyond what they are authorized to do (exceeding their authority is ultra vires), which may result in avoidable legal hassle for the corporation (both to defend the actions of the wayward officer or director, and to go after the wayward officer or director for the damage he/she did). If an officer or director of a corporation is taking liberties with a corporation’s decisions, an attorney should be consulted to help restore proper order.

Next week, we’ll wrap up our discussion of corporate formalities by talking about what happens if corporate formalities are not followed.

Talk Like A Lawyer

Breach of contract: when one party fails to honor his or her obligation under a contract

Closing Argument

“Nothing worthwhile ever happens quickly and easily. You achieve only as you are determined to achieve – and as you keep at it until you have achieved.” – Robert H. Lauer

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