Minutebooks: How Avoiding Seemingly Mundane Paperwork Can Cost Your Business Dearly
Corporate entities must be sure to keep excellent paper records which are orderly and up-to-date. Failure to properly maintain corporate business records creates unnecessary problems with the IRS, jeopardizes the limitation of liability for corporate officers, and hurts your business’s reputation with potential buyers or lenders. A typical minutebook should include at a minimum: the articles of organization, the original bylaws with any subsequent amendments, all documentation relating to the appointment of directors, signed copies of all meeting minutes, any written consents for actions executed by board members, and all executed majority stockholder actions.
Failure to properly maintain corporate minutebooks can have negative tax implications. Corporate entities and the IRS often dispute whether certain expenditures are expenses or dividends. This is an important distinction since corporate expenses can be written off while dividends cannot. If records are not properly maintained, the IRS will almost certainly declare an expense to be a dividend in their favor when there is any ambiguity. This can result in undesirable double taxation. Under extreme circumstances, the IRS could take advantage of poor record-keeping to claim that shareholders of closely-held corporations are individuals not operating on behalf of the corporation. This leads to higher rates of taxation for these individuals.
One of the main reasons for incorporating a business is the benefit of limiting individual liability for the debts and other liabilities incurred by the business. Unfortunately, incomplete minutebooks can jeopardize liability protections. During a lawsuit, the opposing side will usually attempt to “pierce the corporate veil” so that they can reach and collect the personal assets of a business’s owners, stockholders, directors, or officers instead of just the corporate assets. If an action is taken on behalf of the business but there is no clear documentation proving authorization from the business entity, then an individual will be held personally liable for the action. A sloppy record keeping excuse is no defense to bring to court since the business is responsible for maintaining adequate records.
Finally, inadequate minutebooks are a major turn-off for potential purchasers, lenders, or other third parties. Third parties will not find the business to be a credible operation if corporate records are incomplete or missing. Even worse than reputational damage, purchasers or lenders will worry that there are hidden liabilities obscured by the poor records. Questions will unavoidably arise including: have major decisions been properly ratified, what actions have shareholders taken, what has happened at corporate meetings that could cause future headaches, how have directors and officers behaved, and are there internal disputes bubbling under the surface of this business?
If these considerations have you worrying about your business’s minutebooks, you should seriously consider putting your business’s affairs in order. Whether your business needs assistance creating initial minutebooks or requires reconstruction services after years of neglect, an experienced business attorney at The Jacobs Law LLC can help. Contact The Jacobs Law LLC today at ContactUs@TheJacobsLaw.com or 800-652-4783.