If you are a shareholder in a C-corp or a small business closely held corporation (sometimes called “S-corps”), you probably remember when you formed the entity that maintaining your corporation require compliance in a number of different formalities, especially that you need to keep minutes reflecting key corporate decisions and activities and annually installing your officers and directors.
No One Really Keeps Minutes, Do They?
Annual meeting minutes are perhaps the single most overlooked aspect of corporate compliance for small, privately held companies. Owners mistakenly think that no one really looks at these so they aren’t that important. They don’t need to be filed with any government agency, so who will know if they are not done anyway. The reasons why all corporations need to prepare and maintain meeting minutes are discussed below:
1. Liability Protection
I am sure the very reason you formed and are operating as a corporation is to protect the owners/shareholders from personal liability if the business should fail or face financial distress. That benefit goes away if you fail to observe the mandatory corporate formalities according to state law. The corporate veil can be pierced and you will be personally liable. This includes preparing meeting minutes. This is more than just formality for formality’s sake. The corporation is a separate “entity” from its shareholders with its own EIN and credit history. To maintain this separation between personal and corporate finances (to prevent the shareholders from simply operating under the guise of a corporate shell), you need to demonstrate that legally required steps are being taken to appoint officers and elect directors, consider shareholder input, and otherwise operate as a corporation. The law does not differentiate a corporation of one or two people from the large multinational corporations with thousands of employees. A corporation is a corporation and they all must follow the same rules to get the same benefits of liability protection. If you are not doing your annual meeting minutes, you are wasting your time and money on forming a corporation in the first place because you won’t be protected.
Preparing and maintaining meeting minutes is essential if you will seek bank loans, grants, investors or other funding. If you want other people’s money, you’ll need to observe the corporate formalities to survive the due diligence review necessary to be considered. Potential lenders investors will want to ensure that you have your ducks in a row and are operating legally so that they can make a sound investment. If you can’t even do these simple things correctly, what else might be going wrong in your business? Will the business be in trouble from legal compliance issues, fines, penalties, and audits? These are key issues that can stop a potential loan or deal in its tracks.
3. Dispute Avoidance
Who’s in charge and has authority at the corporation? When you and your corporation’s co-owners start questioning one another and decision made, these minutes will be critical to resolving disputes and determining if anyone is at fault or acted without authority.
4. Legal Compliance
In most jurisdictions keeping annual meeting minutes is a legal requirement. (Did I mention that failure to observe the requisite formalities can lead to loss of shareholders’ limited liability? I really want to drive that point home with you!) It can also result in penalties and fines if you are audited by other government agencies such as the Department of Labor, Homeland Security, tax authorities, liquor authorities and other regulatory agencies. Even worse, it is a big problem if you get a legal claim or lawsuit. While it is true that no one checks on a regular basis to be sure you are doing your annual minutes, but they will check in these situations and the last thing you want is to be out of legal compliance when facing an audit, disciplinary activity, insurance claim or lawsuit.
Failure to keep meeting minutes can potentially have tax implications as well. Did you elect for S-corporation tax treatment for pass-through taxation to avoid filing separate corporate taxes? If so, is that reflected in the corporate minutes? The taxing authorities may not recognize your corporation for tax purposes if your corporate charter has been forfeited due to failure to follow the necessary state compliance requirements. These can include filing franchise taxes, biennial or annual reports, maintaining a registered office and registered agent, and of course, keeping your meeting minutes.
Okay, So What Do I Need to Do?
Alright, so now that you understand why keeping corporate meeting minutes is important, how do go about doing them? The safest answer, of course, is to have your annual meeting minutes prepared by your attorney. An experienced corporate attorney will be able to cost-effectively prepare minutes that meet your needs, while also helping ensure that you have not overlooked any issues that either (i) need to be recorded, or (ii) need to be addressed in order to mitigate your corporation’s and its officers’, directors’, and shareholders’ potential exposure.
If you would like assistance with preparing your corporation’s annual meeting minutes and maintaining a compliance corporate minute book, contact our team to discuss your needs