How to Keep Proper Corporate Records
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For most entrepreneurs, corporate record-keeping is the least fun part of the job. When you’re running a growing business, it’s tempting to overlook some of the administrative formalities in order to stay focused on sales, customer satisfaction and new product development.
However, staying on top of your corporate record-keeping is essential for both legal and strategic reasons.
So, if you're operating your company as a corporation, S corporation or LLC and are ready to dive into corporate record-keeping, here's what you should know:
Why you should keep good corporate records
Understanding why corporate record-keeping is important in the first place makes it a lot easier to make time for this task. In short: you'll realize what could happen if you don’t.
First, understand the role these records have in helping you maintain the "corporate veil" protection you need against lawsuits and creditors. If someone sues your business, he or she might try to pierce your corporate veil and show that your business failed to follow proper corporate formalities according to state law.
Having done that, this person might try to go after your personal assets as part of the settlement.
One of the main reasons why you formed a corporation or LLC in the first place was to maintain the shield of limited liability, so you'll want to safeguard that limited liability, with proper corporate records. Don’t give a plaintiff or court any reason to question your company’s compliance.
Beyond the corporate veil, there are other reasons to keep good records: For example, corporate records might be requested by the IRS. You might need to show written evidence (meeting minutes) that your company approved an important decision like changing its fiscal year or electing S corporation status.
Another key reason for keeping accurate corporate records is if you ever want to sell the business. Potential purchasers often want to examine your records to determine past performance. Poor or incomplete records could lower the company's purchase price.
What you need to keep track of
State rules about record-keeping vary. Generally speaking, corporations have more state-imposed requirements than LLCs and may have to keep the following at their place of business:
- Articles of Incorporation (what you filed when you first formed the corporation)
- Any amendments filed with the state
- Corporate bylaws that spell out how you will operate the company
- Annual reports
- Names and addresses of directors and officers
- Names and addresses of shareholders, including their number and class of shares
- Documentation of any actions/decisions from shareholder and director meetings (meeting minutes)
While LLCs have fewer state requirements, many states do have record-keeping rules for LLCs and may require you to keep the following records at your place of business:
- Names and addresses of members and managers
- Articles of organization (what you filed when you first formed the LLC)
- Any amendments filed with the state
- Operating agreement
States vary in terms of specific record-keeping requirements, including details on how long you have to keep records and how you can store records (digitally or paper). Keep in mind that if you expand into other states, you’ll need to follow those states' rules for record-keeping, as well.
Keeping proper meeting minutes
Most questions surrounding corporate recordkeeping are related to meeting minutes. Corporations are required to keep meeting minutes (again, states' specific requirements vary). LLCs do not need to keep meeting minutes unless this task has been stipulated in the operating agreement.
Meeting minutes serve as the official record of corporate activities. They document the major votes, resolutions and transactions that affect the company along with:
- Elections of new officers or directors
- Issuance of stock
- Compensation increases
- Approvals for items like a long-term lease, group health plan or other decision that impacts the company
- Approval for a financial decision like a business loan, sale of assets, election of an S corporation tax status or acquisition of another business
- Annual director and shareholder meetings
Meeting minutes don’t need to include every tiny detail or read as if they were written by a lawyer. Keep the language simple and stick to the basic facts. Essentially, minutes should serve as your company’s institutional memory. As with any kind of documentation activity, it’s best to record the minutes right after the meeting, while all the details are still fresh. Typical minutes include basics like:
- Date, time and location
- Roll call (who was in attendance, who was absent)
- Agenda items and whether they were addressed
- Voting actions (document how each individual voted and who abstained)
You don’t need to file minutes with the state. Instead, they should be kept with your other corporate records for at least seven years. Shareholders, officers and directors are entitled to review meeting minutes upon “reasonable request.”
Stick to a basic format for your corporate minutes (find templates online) and you’ll be more likely to make record-keeping just another regular business process.
A record need take only a few moments to complete. Good records will help keep your company compliant with state law and keep your corporate veil intact.