A View from The CPA Chair

Your Corporate Minute Book:

Reasons to Keep Your Company’s Record Books Up to Date

One of the most commonly ignored aspects of a legal entity is failing to maintain the company’s minutes from its shareholders, members and board of director’s meetings. This is especially true for small businesses and their owners.  It’s important to remember these are the company’s official records and have a legal purpose.

This doesn’t apply just to corporations

Limited Liability Companies, Professional Corporations, PLLCs, Limited Partnerships and virtually all other types of legal entities should maintain their records in a timely fashion.

The entity’s records document the major decisions whether that is:

  • resolutions by the board of directors
  • updates or changes to bylaws
  • any other important decision 

Attorneys will tell you the entity records document becomes very important in case you are sued. You may be at risk if a plaintiff could “pierce the liability veil” potentially leaving the owners at risk.

Reasons

  1. From our perspective, the number one reason is the company’s ownership record book and minutes are the first documents requested by an IRS agent during an audit.
  2. The minute book serves as a “paper trail history” of the company’s action over the years.  This history may be important for current or future decisions by auditors, accountants, attorneys and others.
  3. Attorneys say that up to date records help define the company’s authority to take steps or action.  The official minutes document the board’s decisions to authorize their personnel to take specific actions. Such an action might become controversial from many different angles including the government, banks, customers, minority owners or other interested parties.
  4. Your business attorney often relies on the corporate minutes to base their legal opinions on those very same corporate actions or proposed business transactions.  If your records are timely, you might save your attorney some time and the company money.
  5. Many companies are formed online and often by their owners rather than attorney.  A company minute book and ownership (stock) ledger are often overlooked.  Getting one is pretty easy.  It will serve to keep important legal contracts, agreements, merger agreements and so forth.  It is an excellent place to store those documents.
  6. A minute book tracks dividend declarations, bonuses, 401k matching and other compensation decisions.  These decisions may be of significant importance related to income taxes and IRS audits.  It documents the reason for such expenditures or retaining earnings within the company to avoid excess accumulated earnings issues.
  7. Ownership records track who invested in the company, when they invested and how much they invested.  Changes in ownership, buyouts, options, and transfers could have a significant impact in lawsuits, tax audits and other matters.  Ownership is a critical aspect of complying with the complex S-Corporation rules.
  8. We have heard from a number of business owners the statement “I set up an LLC so I don’t have to record company minutes.”

We are not attorneys nor do we give legal advice. We do make all possible efforts to highlight important issues our clients need to be aware of.

So, to address this statement, we have asked one of our trusted corporate attorneys to express an opinion on the above statement about LLC’s not having to record minutes.

Entities are set up to create a separation between an individual (or individuals) and the operation of the business.

This is to limit personal liability among other reasons.  That privilege can be lost if the entity is set up in a “sham” without legitimate separation.

One of the easiest ways to prove this in court is to show the organizational formalities (i.e. bylaws or a company agreement, resolutions, minutes, etc.) were ignored.

If there is more than one owner, the problem becomes even more serious.  Artificial entities (corporations, LLCs, limited partnerships, etc.) are “creatures of the state.”

State law allows them to enjoy the same status as a person meaning they can enter into contracts, bring lawsuits, etc.  However, they can only operate as the laws allow.

For LLCs, all of their management, rights, etc. must be set out in the company agreement.  The company agreement, for instance, will describe who has power to sign for the company.

Without that authority, it can be argued that anyone signing would be doing so individually and not for the company.  That is, the signer would be individually liable under the contract.  This defeats the purpose for which entities are used.

Further, when you have more than one owner, problems can arise as to who makes decisions, how profits are distributed, what happens if the company needs money, how do we end it if needed and so forth.

For LLCs, all of these should be set out in the company agreement.  In the absence of an agreement, a dispute would have to be settled in court with all the costs and delays that entails.

We constantly search for ways to help our clients avoid problems.  Looking forward for potential strategic moves, problems and opportunities is our fundamental approach in working with clients.  



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