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Editorial 11 MIN READ

Separate-entity formality in a pandemic year: the record a court will actually see

Zoom minutes, DocuSigned consents, and a distribution schedule rewritten mid-crisis, all of it auditable

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 9 sections
  1. The alter-ego test has not softened
  2. Zoom board meetings, documented
  3. Electronic signatures, and the safe harbor behind them
  4. Operating-agreement amendments you probably made this year
  5. Records in the cloud, and who can see them
  6. The bank account did not get easier
  7. What the SEC said about remote boards, in brief
  8. The rule of thumb
  9. Sources

eparate-entity formality looked like a file cabinet in 2018. In November 2020 it looks like a shared drive, a DocuSign audit trail, a Zoom recording nobody quite knows whether to keep, and an operating agreement that was amended twice since March to permit distributions the original draft never contemplated. The test a court applies when a creditor asks to pierce the veil has not moved; the evidence the test now runs on has.

The work that was merely recommended before the pandemic, a written operating agreement, written consents, a general ledger, separate bank accounts, is now recommended plus remote. The question for this quarter is whether the remote version of the file looks like a business to a judge or looks like a founder who took the year off from running one. Our original separate-entity-formality piece laid out the case law. This is the 2020 update to the habits.

The alter-ego test has not softened

A pandemic is not a defense to commingling. The doctrinal spine remains what it was: Walkovszky v. Carlton, 18 N.Y.2d 414 (1966), for the proposition that undercapitalization alone does not pierce but that the owner must not be conducting individual business through a shell; and Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 (7th Cir. 1991), for the two-prong unity-plus-injustice formulation and its factor list: inadequate records, commingled funds, undercapitalization, and the owner treating entity assets as personal. Delaware's alter-ego standard, articulated in NetJets Aviation, Inc. v. LHC Communications, LLC, 537 F.3d 168 (2d Cir. 2008) (applying Delaware law), puts the same weight on whether the entity's funds moved in and out of the owner's pockets without documentation.

What has shifted in 2020 is the record that answers those questions. Before the pandemic, a court pulling on the thread of formality lapses reviewed paper: a three-ring binder of minutes, a general ledger printout, bank statements, a signed operating agreement. This year the court pulls a shared-drive folder with timestamps, an electronic signature certificate, and a Zoom meeting ID. The inputs are digital; the factor list is identical. A creditor's lawyer in 2021 is going to subpoena the shared drive and the e-signature vendor's audit trail and read them the way a lawyer in 2018 read the binder.

Zoom board meetings, documented

Most LLC operating agreements written before 2020 either required in-person meetings or were silent. Silence was fine when the members were three people who met quarterly at a kitchen table. Silence is less fine when the quarterly meeting happened over Zoom on April 14 and nobody took notes because everyone was getting used to the software.

Delaware's DGCL authorizes remote participation in stockholder meetings under 8 Del. C. § 211(a)(2), and the LLC Act permits members and managers to meet by any means of communication that allows participation under the operating agreement or by the default rules of 6 Del. C. § 18-404. Governor Carney's tenth modification to the State of Emergency Declaration, issued April 6, 2020, expressly authorized public companies to notice stockholder meetings as virtual-only by SEC filing and press release. The July 16, 2020 amendments to the DGCL, effective retroactive to January 1, 2020, expanded the Section 110 emergency-bylaws framework to cover epidemics and pandemics and gave boards authority to postpone or relocate meetings when an emergency is declared. Remote meetings are not a pandemic improvisation any longer; they are a documented corporate-law feature, and the court that looks at your minutes knows it.

The practical consequence is that a Zoom meeting is the same evidentiary artifact as an in-person meeting provided the minutes say so. Minutes that note the date, the members or managers present, the medium (Zoom, Teams, conference call), the matters considered, the resolutions adopted, and a roll-call vote with names are sufficient. Minutes that describe "a call on or around the 14th about the budget" are not. A one-page written consent in lieu of meeting, signed electronically by every member, is the cleanest path for any decision where the deliberation does not add evidentiary value; the meeting format only matters if the decision turned on discussion.

Electronic signatures, and the safe harbor behind them

The legal question of whether a signature on a PDF has the same force as a signature in ink was settled long before 2020, but the state-level plumbing became unambiguously friendly to entity documents only with Delaware Senate Bill 88 of the 150th General Assembly, signed June 19, 2019 and effective August 1, 2019. SB 88 enacted 6 Del. C. § 18-113 (for LLCs), 6 Del. C. § 15-124 (for general partnerships), and 6 Del. C. § 17-113 (for limited partnerships), each of which is a non-exclusive safe harbor declaring that any act or transaction contemplated by the statute or by the governing document may be provided for in a document, that an electronic transmission is the equivalent of a written document, and that a signature may be manual, facsimile, conformed, or electronic unless the governing document expressly says otherwise. The DGCL got parallel treatment in new 8 Del. C. § 116. The safe harbors carve out filings with the Division of Corporations, certificates evidencing partnership or membership interests, and a few registered-agent and service-of-process matters, which still require ink or their own statutory formalities.

On top of the Delaware statute sits the federal E-SIGN Act, 15 U.S.C. § 7001, and the Uniform Electronic Transactions Act, which 49 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have adopted (New York has its own statute, N.Y. State Tech. Law §§ 301 to 309). A DocuSigned operating agreement executed by members in three different states is enforceable under each of their laws. What DocuSign, HelloSign, and Adobe Sign contribute beyond the signature itself is the audit trail: a per-signer log with IP addresses, email confirmations, timestamps, and a tamper-evident hash. That audit trail is the 2020 equivalent of a notarized signature for veil-piercing purposes. Keep it with the document. If your e-signature vendor's export format buries the certificate behind an admin login, move to one that does not.

One practical note: the Delaware safe harbors do not apply to certificates of formation, amendments, or other filings made with the Division of Corporations, which still expect PDFs with signatures the Division can read. The Division has accepted faxed and emailed filings throughout the year and expanded its electronic-filing portal, but the statutory carve-out means that the Division's own requirements control what it takes at the counter, not 18-113. File the way the Division tells you to file.

Operating-agreement amendments you probably made this year

Plenty of operating agreements got amended between March and September. The common edits fall into a few categories, each of which has an evidentiary footprint worth attending to.

The first is the meeting-format amendment. If the agreement required in-person meetings or an annual meeting at a specified place, members either waived the requirement by unanimous written consent or amended the agreement to permit remote meetings. Both are fine; document which one you did. A written consent waiving one meeting is not an amendment. An amendment to the quorum, notice, or meeting-location provisions is. Label the document correctly and store it with the original.

The second is the distribution amendment. Businesses that expected a strong year in March rewrote their distribution waterfalls in April when revenue fell off. Businesses that took PPP loans coordinated the distribution schedule with the eight-week or twenty-four-week covered period. Some agreements were amended to permit preferred-return accruals to continue paying in kind while cash distributions were suspended. All of those are legitimate; each must be consistent with the solvency limitation in 6 Del. C. § 18-607 or its equivalent in your state's LLC act, which prohibits distributions that would leave the LLC unable to pay its debts as they come due. A distribution amendment that, read against the ledger, looks like a strip of the company in advance of a lawsuit is a veil-piercing exhibit, not a governance update.

The third is the manager-authority amendment. Operating agreements that required member consent for material contracts or for borrowings above a threshold were edited in some cases to let a sole manager respond to shifting pandemic conditions. If you did this, preserve the before version, the after version, and the consent or vote that authorized the change. A lender, a regulator, or a creditor's lawyer asking in 2022 why a particular lease was signed by the manager alone will want to see the 2020 amendment that let the manager do it, not a reconstructed theory.

Records in the cloud, and who can see them

The books-and-records rule, 6 Del. C. § 18-305 in Delaware and Cal. Corp. Code § 17704.10 in California as of 2020 (the renumbered analog of the older § 17701.13), presumes the records exist and are accessible to members on proper demand. A QuickBooks Online file, a Xero file, a Google Sheet, a Notion page: these are books for purposes of the statute if they are maintained with the regularity a business would maintain paper records. The storage medium is irrelevant; the completeness and the tie-out to bank statements are not.

Two failure modes became visible in 2020. The first is the founder who moved bookkeeping from a desktop QuickBooks file on the office computer to a cloud file on a personal Google account, and then lost access when an unrelated password reset locked the account out. The records exist somewhere but the entity cannot get to them; the court reads that as no records. The second is the shared-drive folder organized by nobody in particular, where an operating agreement sits in three versions with no indication of which is current, and minutes sit in a mix of PDF exports, Word drafts, and Slack messages. Either the file tells a story or it does not.

Concretely: name the entity as the account holder on every SaaS tool that holds its records. Use an address at the entity's domain, not a founder's personal Gmail. Keep one canonical folder structure (formation, governance, financial, tax, contracts) and keep only final, dated copies in the canonical folders. Put the drafts somewhere else. If your state or operating agreement requires retention of financial statements for a period (California's three years is typical), back up the cloud file to a second location on a schedule you can articulate.

The bank account did not get easier

The single most load-bearing formality, a separate bank account in the entity's name under its own EIN used only for the entity's business, survived the pandemic in the sense that nothing about it changed and everything about it got harder to enforce. Banks closed lobbies in April. Opening a new account for a new LLC took longer than usual, sometimes weeks, sometimes a FedEx of notarized forms. Founders who were accustomed to a same-day walk-in appointment instead ran the new entity's expenses on a personal card for a month while the account was being opened, intending to reimburse.

Intend is not the same as did. If the personal card ran entity expenses for six weeks in April and May, the entity's books need a reimbursement transaction on each expense, paid by wire or ACH from the entity's account to the owner's, with a memo and a date, and booked as an expense of the entity and a repayment to the owner. The reimbursement does not have to be instant, but it has to actually happen, and it has to happen before the year closes. A pattern of "reimbursable" personal charges that are never reimbursed is exactly the pattern Sea-Land and DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir. 1976), describe.

The same applies to PPP proceeds that briefly sat in a personal account before being transferred to the entity. The money is forgiven based on how the entity used it, but the fact that it transited a personal account is a formality lapse that wants a memo, a dated transfer, and a ledger entry to cure. The forgiveness decision runs on one set of records; the veil-piercing decision in a later suit will run on the same records.

What the SEC said about remote boards, in brief

SEC staff guidance issued March 13, 2020 and updated April 7, 2020, addressed public-company annual meetings specifically. The staff encouraged virtual or hybrid meetings where state law permits, asked issuers to notify shareholders of format changes through a filed document and a press release, and told proponents of shareholder proposals that inability to attend for COVID-related reasons would qualify as "good cause" under Rule 14a-8(h) for the current and following two calendar years. The relevance to a private LLC is indirect, but the guidance reinforces the general proposition that a remote meeting is a real meeting if the corporation documents the format change, the notice, and the mechanism for participation. Private entities should document the same three things.

The rule of thumb

If the shared drive you would hand a forensic accountant tomorrow morning tells the story that an entity existed, met, decided, banked, borrowed, lent, and transacted with its owner at arm's length, with timestamps and e-signature certificates and minutes that name people and dates, the shield is doing its job through the pandemic. If any part of that sentence made you hesitate, the week you want to fix it in is this one, before the year closes and the records freeze into whatever shape they will have when a creditor's lawyer eventually asks to see them.

Sources

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