Jun 09, 2016

Why are corporate minutes such a big deal?

Business owners should be diligent in formalizing their business decisions. Corporate minutes are an effective tool to document the actions taken by owners of a business during the year, such as approving annual budgets and salaries, and electing officers. Not only do most state laws require that business entities maintain accurate corporate records, but documenting the approval (or disapproval) of business decisions provides an added layer of protection for business owners.

All business entities, no matter how big or small, should maintain accurate and updated corporate minutes for the following reasons:

  • Shield owners from personal liability – In order for officers, directors, shareholders, managers, members, partners, etc. of a corporate entity to avail themselves of the liability protection offered by the “corporate veil,” business entities must comply with corporate formalities. Without current and complete corporate minutes, creditors may “pierce the corporate veil,” and a court could potentially hold owners personally liable for the actions and debts of the corporate entity.
  • Certain corporate action requires approval – State statute, as well as an entity’s bylaws, operating agreement or partnership agreement, may require approval of the shareholders, officers, directors, managers, members or partners, as the case may be, prior to the corporate entity taking certain actions. For example, approval may be needed for the corporate entity to engage in a particular transaction or to amend the governing documents. Corporate minutes are ideal for documenting the approval for any such action.
  • IRS audits – Oftentimes, as part of the IRS audit process, the IRS will request to review an organization’s corporate minute book. If corporate minutes have not been maintained, it can be time consuming and costly to recreate years of documentation. Maintaining an up-to-date minute book that accurately reflects corporate dealings among owners can alleviate this burden.
  • Officer and director liability – Corporate minutes may also serve as evidence that officers and directors have conducted themselves in accordance with their fiduciary obligations as officers and directors in the event a decision made by an officer or director is called into question.

Feel free to contact us for additional ideas about how to protect yourself and your business. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Kathryn L. Kaler, Associate