Why You Should Keep Your Minutes and Other Records Updated
Keeping accurate and up-to-date corporate minutes and accounting records is important for a number of reasons.
Your minutes and other records are like the title to your house. They’re proof that you own your business. And just like you wouldn’t leave your house title lying around, you shouldn’t neglect your corporate records.
Here are a few reasons why it’s important to keep your records up to date:
- To protect yourself from personal liability. If something goes wrong with your business, your corporate records can help show that you’re doing things the right way. This can help protect you from being held personally liable for the company’s debts.
- To avoid IRS audits. The IRS loves to audit businesses with poor recordkeeping. If your records are a mess, you’re more likely to get audited, and you’re more likely to get hit with penalties.
- To make it easier to sell your business. If you ever decide to sell your business, potential buyers will want to see your records. If your records are in order, it will make it easier to sell your business and get a good price for it.
Legal Requirements
California law requires corporations to keep adequate and correct written minutes of shareholder and board of directors proceedings. Failure to comply with this statute may result in negative consequences.
Personal Liability Protection
One of the key benefits of doing business as a corporation is that shareholders are not personally liable for the corporation’s obligations. However, this protection can be lost if a court determines that the corporate veil should be pierced and shareholders held personally liable.
Poor corporate recordkeeping is one factor that can lead to the corporate veil being pierced. In fact, many cases cite the failure to keep corporate records as a significant reason for holding shareholders liable.
Allegations of Self-Dealing and Conflicts of Interest
In corporations with multiple shareholders or directors, it is important to have formal approval from the board of directors before any shareholder, director, or officer engages in a transaction with the corporation. This is known as self-dealing.
Without prior approval, it is much easier for the shareholder or director who is not involved in the transaction to make a claim against that participant personally, arguing that the transaction was unfair to the corporation.
IRS Audits
The Internal Revenue Service (IRS) emphasizes accurate and complete corporate minutes in its audit procedures. If corporate minutes are incomplete, the rest of the audit is more likely to be difficult.
An IRS audit exposing deficient corporate minutes may result in any or all of the following:
- The corporate status of an otherwise legitimate corporation may be disregarded for tax purposes, with the shareholders taxed on corporate income at their individual rates plus denial of corporate deductions.
- Corporate deductions for salary or other compensation paid to shareholders, directors, or other employees may be denied.
- Loans between the corporation and shareholders may be recharacterized to the taxpayer’s disadvantage.
- An IRS finding of tax liability may result in interest, penalties, and fines.
Selling the Business
When you are selling your business, potential buyers will examine your corporate minutes and accounting records to determine the company’s performance. Poor recordkeeping can affect the purchase price.
Conclusion
Keeping accurate and up-to-date corporate minutes and accounting records is important for both legal and practical reasons. It is a relatively small investment of time and effort that can avoid much bigger problems down the road.
So don’t neglect your corporate records. It’s worth the time and effort to keep them up to date.
Here’s a tip: If you’re not sure how to keep your records up to date, there are plenty of resources available online and at your local library. You can also hire a professional to help you.