A corporate resolution is a formal, written declaration that memorializes a decision made by a company’s governing body, such as its board of directors or shareholders. These documents transform preliminary discussions into official, binding corporate actions, providing a clear audit trail of all major organizational changes and approvals. Understanding how to properly draft and execute a resolution is foundational for maintaining sound corporate governance and ensuring organizational accountability.
Defining the Corporate Resolution
A resolution is the specific documentation that gives legal effect to a verbal decision, turning it into a binding corporate mandate. The structure of a proper resolution typically includes two distinct sections: the recitals and the operative clause. The recitals, often beginning with the word “Whereas,” provide the necessary context, justification, and background for the proposed action.
The operative clause is the heart of the document, beginning with the phrase “Be it Resolved,” or similar language, and clearly articulating the specific action being taken. This clause must be unambiguous, specifying exactly what is being authorized, who is responsible for implementation, and the scope of their authority. The signed and dated resolution then serves as proof that the decision was formally adopted by the authorized corporate body, confirming that proper internal governance procedures were followed.
Why Formal Resolutions Are Legally Necessary
Formal resolutions are mandated by corporate law to demonstrate that a company’s governing body has exercised due diligence in its decision-making. By documenting that directors and officers followed proper procedure and acted in the company’s best interest, the resolution helps protect them from potential personal liability relating to their duties.
Third-party entities frequently require a corporate resolution to validate a transaction before proceeding. Banks may demand a resolution to verify who is authorized to open an account, while regulatory bodies use them for compliance checks. The Internal Revenue Service may also request these formal documents to substantiate certain financial activities or major corporate restructuring moves.
Key Types of Corporate Resolutions
Decisions Based on Authority
The nature of the decision dictates which body holds the authority to pass the resolution. Director Resolutions are used for matters concerning the day-to-day management and operational affairs of the company. These may cover activities like approving the annual budget, authorizing the opening of a new bank account, or appointing corporate officers.
Shareholder Resolutions, conversely, are reserved for decisions that fundamentally alter the corporate structure or its governing documents. These actions include approving a merger or acquisition, amending the company’s articles of incorporation, or initiating the process of corporate dissolution.
Decisions Based on Required Majority
Resolutions are also categorized based on the level of approval required for them to pass. An Ordinary Resolution requires a simple majority, meaning more than 50% of the votes cast must be in favor of the proposal. This threshold is applied to the majority of routine decisions made by both directors and shareholders.
A Special Resolution, however, is reserved for decisions of significant structural impact and requires a supermajority for approval. This higher threshold typically ranges from two-thirds (66%) to three-quarters (75%) of the votes cast. Actions requiring a special resolution often include changing the company’s name, altering the share capital structure, or authorizing a major sale of company assets.
Common Scenarios Requiring a Resolution
A wide variety of corporate actions necessitate the creation of a formal resolution to ensure legal compliance and internal accountability. Any action that grants or limits authority to an officer or a group of employees requires a resolution, such as the initial appointment or the subsequent removal of a corporate officer. Major financial transactions are always documented this way, including authorizing the issuance of new debt or equity to raise capital.
Resolutions are also required when the company needs to execute large-scale, non-routine asset transfers or purchases. For instance, the approval to acquire a significant piece of real estate or to purchase new operating equipment must be formalized through a resolution. Administrative actions like opening or closing corporate bank accounts and approving large, multi-year vendor contracts are standard scenarios demanding this official documentation.
The Process of Drafting and Approval
The process of creating a binding corporate resolution begins with the careful drafting of the document’s language. The proposed text must first be reviewed to ensure the recitals accurately reflect the context and the operative clause clearly defines the specific action, avoiding any ambiguity regarding the authorization granted. Once the draft is finalized, a formal meeting of the appropriate governing body—either the board of directors or the shareholders—must be called according to the procedures outlined in the company’s bylaws.
Alternatively, if permitted by the company’s governing documents, a resolution can be adopted through a unanimous written consent, which bypasses the need for a physical meeting. During the meeting, the proposal is presented and the body proceeds to vote, with the results recorded in the meeting minutes. The number of votes required for the resolution to pass—either an ordinary or special majority—is determined by the nature of the action and the rules set forth in the bylaws or applicable corporate statute.
Following a successful vote, the resolution must be formally certified by the Corporate Secretary or another authorized officer. Certification involves the officer attesting that the document is a true and accurate record of the action taken by the governing body on the specified date. This final step transforms the approved proposal into a legally recognized corporate instrument.
Maintaining and Storing Corporate Records
Once a resolution is officially approved and certified, it must be permanently integrated into the company’s corporate records. The resolution, along with the corresponding meeting minutes, is typically placed in the company’s minute book, which serves as the official historical record of all corporate actions. This record-keeping is a legal requirement in most jurisdictions and demonstrates that the company is properly maintaining its separate legal identity.
Proper storage is necessary for successful financial audits, for defending the company in legal disputes, and for demonstrating compliance to regulators. Failure to maintain these records can expose a company to legal challenges. Poor record-keeping could lead a court to disregard the corporate form and hold the company’s owners personally liable for business debts, a concept known as piercing the corporate veil.