Business Basics: Four Good Reasons to Keep Your Corporate Records Up to Date
Clients often ask why they should prepare annual minutes for their business entity. Here are four good reasons.
- It’s the law.
California Corporations Code Section 1500 mandates that, “each corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, board and committees of the board . . .” Certain actions require approval by either the board or shareholders, such as the appointment of officers and the election of directors. These actions are supposed to be documented in writing.
Although other business entities, such as limited liability companies (LLC), are not required to hold annual meetings, California Corporations Code Section 17701.13(a)(7) mandates that the entity shall maintain “books and records of the limited liability company as they relate to the internal affairs of the limited liability company for at least the current and past four fiscal years.” Thus, the lack of formalities for annual meetings is not an excuse from maintaining accurate minutes or otherwise disregarding “corporate” formalities.
- Respect the entity or risk veil piercing.
The need to respect the separateness of the entity is the same for both LLCs and corporations. Without deeply diving into the law of alter ego, the short answer is that one of the first factors that a court will consider in assessing if it is going pierce the corporate veil is whether the entity maintains corporate records. Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal. App. 2d 828 (1962). The policy is simple: if the owners of the entity fail to maintain corporate formalities and disrespect the separateness of the entity from themselves, then the court will do the same. That means that the court will allow the corporate veil to be pierced, thereby exposing the personal assets of the owners (shareholders and members) to liability.
A recent example of this is Denny v. Breawick, L.L.C., 2019-Ohio-2066, where an Ohio appellate court held that the doctrine of piercing the corporate veil applied and found the sole member of two LLCs was personally liable for a judgment. In that case, the member failed to maintain any corporate formalities. The LLCs paid the member’s personal expenses (the member did not even have his own bank accounts), and the LLCs failed to maintain any corporate records.
The moral of the story is this: respect the entity and treat it like it is separate and distinct from the owners. Otherwise the court will not respect the distinction and the owners will pay.
- It looks good.
Maintaining good minutes provides a historical record of significant events in the life of the entity, such as loans, leases, approval of major acquisitions, and any other significant events that are outside of the entity’s ordinary course of business. The minute book will likely be reviewed by auditors, lenders, potential investors, or potential acquirers. So, maintaining accurate records provides one example of how the owners have treated their business, i.e., is everything neat an orderly or is it unkept and disorganized.
- It keeps owners informed.
For many business entities there is a separation between the owners who are actively involved in the day-to-day operations of the enterprise, and those who are more passive (the silent investors). Maintaining and distributing the minutes to those “less active” owners is important for keeping them informed about significant events and transactions that have been undertaken by the entity. It also lowers the risk of a lawsuit from a passive investor who might otherwise try to claim, “I didn’t know . . .” or “I wasn’t told . . .”
Conclusion.
Maintaining accurate minutes is not only required by the law, but it is just a good business practice. It provides a historical account of significant events for the entity, it keeps the less active investors informed, and it lowers the risk of personal exposure for the owners. It also provides the first impression for those who have a need or desire to review the records of the business.
We are here to help and answer questions on this important “housekeeping” and other governance matters that impact business entities.