When it comes to running a business, you have to make sure that you keep proper books and records pursuant to your state’s law. During meetings with directors and shareholders, you may be required to record corporate minutes. Otherwise, you could be in violation of the law.
Example: You recently filed the incorporation documentation with your state. The existence of the corporation begins after you file the incorporation papers. Now you’re ready to begin. You have your first meeting to adopt by-laws, elect directors and transact other business pursuant to your state’s law. You should record your actions in writing.
States require corporations to keep correct and complete books and records and to keep minutes of the proceedings of its board of directors, shareholders and executive committee, if any. The corporation must also keep a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record.
Any of the foregoing books, minutes or records may be in written form or in any other form that is capable of being converted into written form, within a reasonable time.
Keeping corporate minutes also provides documentation in the event of a dispute between officers, directors or shareholders.
Right of Inspection and Prima Facie Evidence
The main reason it is necessary to keep proper books and records is because shareholders (the owners of the corporation) have a right, within reason, to inspect the books and records (for example, to look for malfeasance). A shareholder of record, upon a written demand, usually has a right to examine the minutes of a shareholder meeting. The corporation is required to make available such information in written form. Further, upon written request of a shareholder, within reason, the corporation must provide the business’ annual balance sheet and profit and loss statements.
There are some limitations. For example, the shareholder may have to swear that the inspection of the books, records and/or minutes is in the interest of the business and not for the purpose of aiding and abetting anyone procuring information for any other purpose. In any event, if the business refuses to provide access to the books and records, the shareholder could request judicial intervention to permit the inspection.
A court could also compel the production of minutes for examination of the books and records. Books and records are prima facie (meaning “on its face”) evidence of the facts in favor of a plaintiff in any action against a corporation, officers, directors or shareholders.
Not all meetings require keeping minutes. Meetings held to make routine business decisions do not generally need to be recorded. Recordkeeping requirements only generally kick in for official meetings with the board of directors and shareholders in attendance.
Tax Reasons for Keeping Books and Records
Keeping proper books and records may be necessary to show evidence of corporate activity for changes in tax status. They can be used to document the company’s intentions for transactions that have major tax significance. The IRS may require written evidence such as minutes to approve important tax decisions such as changing the company’s fiscal year-end and making an S corporation election.
If these types of items are not noted in the minutes, then the IRS could disallow tax benefits or challenge the decisions made by a company. Also, as a standard practice during an IRS audit, an auditor may request a view a company’s minutes.
What to Keep In Minutes
Common items to document in your business minutes include actions such as:
- Electing officers or directors;
- Establishing or making changes to banking relationships;
- Issuing stock to shareholders.
- Adopting or amending a buy-sell agreement between the corporation and shareholders.
- Executing legal agreements, such as long-term leases;
- Establishing a group health plan, insurance plan or retirement plan;
- Getting approval for business loans or credit lines;
- Obtaining approval for an S corporation election and other tax decisions related to your business entity;
- Making changes in business ownership;
- Approving financial decisions such as acquiring another business and selling business assets; and
- Making amendments to your articles of incorporation or bylaws
Not Keeping Proper Records May Provide Further Support for Piercing the Corporate Veil
The “corporate veil” refers to the protection that corporate and limited liability company (LLC) owners have from creditors and lawsuits. “Piercing the corporate veil” means that a plaintiff who is suing a corporation may include certain owners in the lawsuit. This can happen when the business fails to follow corporate formalities, or when there is personal use of corporate funds or undercapitalization.
Therefore, it is important to stay in compliance with state law pertaining to books and records. One of the most important reasons for forming a corporation or an LLC is to construct and maintain a legal shield of limited liability, and you want to safeguard this protection with proper books, records and corporate minutes.