Our regular readers may recall that this always timely, critically important, but all too often overlooked issue was the subject of postings written by Dirk Beamer on January 8, 2013 (“Tedious Resolutions and Corporate Record Books”) and again, by Kathy Spray on September 4, 2013 (“Have You Seen Your Corporate Record Book Lately?”). In light of some issues that I have dealt with for a couple of clients in the past few weeks, we thought that another reminder (and, perhaps, some gentle, if not so subtle, prodding) might once again be in order.
Recall that the previous postings emphasized the importance of maintaining an updated corporate record book for a number of reasons, including the need to maintain the shield that protects the corporation’s shareholders, officers, directors, and others, from personal liability for the acts of the corporation (referred to in the law as “the corporate veil”). While a corporation must necessarily act through people (its shareholders, officers, directors and others), an updated and complete corporate record book will serve as evidence that the actions of these individuals were, in fact, on behalf of the corporation and not themselves. In other words, if the individuals who make the decisions and carry on the business of the corporation can show that they have treated the corporation as an independent business entity, separate and apart from themselves, they should not be held personally responsible for things done in the name of the corporation. That’s where the corporate record book comes in. As the repository for the minutes of the meetings of the shareholders, meetings of the directors, corporate resolutions, and so on, it is the best proof that the corporation was, in fact, treated as a business, separate and apart from the individuals involved.
The reality of this has been brought home to me recently through a couple of clients. A couple of years ago I had the privilege of organizing a new corporation for a client. Once all of the mandatory filings were made, we talked about the importance of the corporate record book. My client asked me to take care of putting that together for him, and, to keep it updated. Needless to say, I did. Just a few weeks ago he called to tell me that his business is being audited by the IRS. One of the first items on their list of things to produce was the corporate record book.
Further, when talking to potential, new business clients by phone, I have developed the habit of checking their corporate status on-line while I am talking to them, using the website maintained by the Michigan Department of Licensing and Regulatory Affairs, Corporation Division. In doing so I’ve discovered that it is not at all uncommon to find that unknown to the owner(s), the business had been dissolved as a matter of law for its failure to file its state mandated annual reports for two (2) consecutive years. While the problem is fixable (with good standing status restored), it would certainly not reflect well on the corporation if a lawsuit had been filed while it was in dissolved status.
So, that’s it; yet another reminder. Don’t ignore your corporate book, and be sure to file your Michigan annual reports on time.