It is a well-known legal principle that, once incorporated, businesses are recognized as legally separate from their individual shareholders (or “members” in the case of an LLC). This legal separation, called “the corporate veil,” shields business owners from having to answer personally for actions taken by or on behalf of the business; and most business owners I know agree that this protection from personal liability is the single most important advantage of incorporating their business. Unfortunately, many business owners are unaware that there are steps that must be taken in order to maintain this separation long after the filing of incorporation documents.
In order to enjoy the benefits of incorporation, corporate formalities must continue to be observed throughout the life of the company and must be documented with properly maintained records such as corporate minutes, resolutions, bylaws, and annual reports, all of which should be compiled in a corporate record book. Regularly maintained records evidence and protect the corporation’s legally separate status and prevent creditors, including the IRS, from challenging the validity of the corporate veil (called “piercing the corporate veil” in legal terms). Without such evidence, shareholders may be left open to creditors seeking the personal assets of the business owner to pay corporate debts.
In a busy world and in our struggling economy, shareholders, directors and officers often find it difficult to take time away from the daily operations of the company to draft corporate minutes and resolutions, or even to file and organize existing records. Keeping corporate records up-to-date, however, should be high on the priority list. The corporate record book should be a written demonstration that the company exists, acts, and behaves separate and apart from its shareholders. It should include a history of share ownership of the company from its inception and should reflect actions taken by the company from year to year. In addition to demonstrating corporate behavior, the record book should provide evidence of effective dates of other corporate sale and purchase activity for tax purposes. Corporate documentation justifies the accrual of expenses and other fixed costs, and provides audit backup evidence. In the event of legal action, the corporate record book provides important evidence of business activities, and corporate record books are essential in the event of a potential sale of the company or a majority of its assets. Review of the company’s corporate records, called “due diligence,” will assure that the company has been properly maintained before an offer to invest or purchase can be made.
The old adage, “the devil is in the details,” certainly applies to corporate record keeping. While maintaining corporate records takes time away from “income producing” activities, it is an easy and inexpensive thing to do, and well worth the effort. And, after all, it’s the law. If you would like more information on maintaining your business’ corporate records or bringing them up date, please contact us