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Maintaining Corporate Records

Updated: Feb 16

Different states have different factors they consider when it comes to veil piercing (that is, ignoring the liability shield provided by limited liability entities). Critically, most states require corporations to comply with all corporate formalities (I would be surprised if it was merely "most states" and not "all US jurisdictions"). This includes maintaining its corporate records.


What are corporate records?


Corporate records are those documents that provide a record of the corporation's activities, that reflect the corporation's compliance with all state requirements for operating a corporation in that state, and show compliance with IRS requirements.


I know that's broad (it's meant to be).


What does this include?


At a minimum, in the veil piercing context, it includes the following:

  1. Articles/Certificate;

  2. Bylaws or operating agreement;

  3. State corporate filings (or at least the most recent filing);

  4. Notices and waivers of annual corporate meetings;

  5. Minutes of annual corporate meetings;

  6. Notices and waivers of special corporate meetings

  7. Minutes of special corporate meetings;

  8. S election confirmation letter (if applicable);

  9. IRS letter reflecting the corporation's employer identification number;

  10. Current list of shareholders/members;

  11. Businesses and other licenses;

  12. Stock ledger (for corporations).

In the financial context, the term "corporate records" includes financial statements, tax returns, transfers of real estate and other large assets, employment records, licenses, etc. You need to keep track of those to avoid other types of legal liability as well.


How do you maintain them?


The short answer is to create, organize, and maintain a paper trail. If the shareholders have a meeting, document it. If there is a sale of real property, document it. If there is an acquisition, a new license is required or becomes available, or if the business moves to a new location, document that change.


Many attorneys have a corporate supply company from which they order corporate books. The packages usually include other items including stock certificates, a corporate seal, and a personalized binder in which to keep your records (some companies include bylaws or operating agreement templates as well, but I recommend having your attorney draft those).


The best way to maintain your records is to have a set place for storing them, and keeping that place organized. Whether that's the professional personalized binder or a file cabinet, you need to make sure you keep all of your corporate records in one place and that they are available for inspection. For larger transactions, get comfortable asking yourself if you should document the transaction (for example, purchase or sale of real estate).


What if you don't maintain them?


You're tempting fate and inviting litigation.


For one, as a business owner, it's just good practice to keep good, detailed, accurate records. Failure to maintain the corporate book is usually a symptom of a larger problem of disorganization.


Another reason is that it makes your business look more valuable to potential investors or buyers. If a potential buyer sees that your records are well maintained, not only does that bode better on you and the business, but it allows them to see what has been done in the past, to assess potential areas for growth (or liability), to determine what existing contracts should be continued, and assess possible trends that might help the business continue to grow.


And if your business is sued, the suing party is going to ask for a lot of documents in discovery. If that party is a co-owner (member or shareholder), they are going to ask for corporate records. If you don't provide them, they are going to try and pierce the veil (meaning sue the owners directly). If the records are maintained well, the suing party's likelihood of success decreases.


You'll also need your records to dissolve or terminate the business when you're done with it. An improper dissolution removes the limited liability shield.


Why should they be kept available for inspection?


Obviously owners should have access to the records of a business that they own. And other constituents involved in the direction and operation of a business (think of directors and officers) should be able to access those same records. California and Texas require it, as do most other states. See Cal. Corp. Code section 1600, Tex. Bus. Orgs. sections 3.151, 101.054(e) (effective June 1, 2022).


Conclusion


It is critical to maintain the corporate records to avoid veil piercing and extra liable. The corporation is obligated to keep and maintain its records, and there can be serious legal consequences for failing to do so.

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