Builders and Contractors Exchange
Weekly Bulletin: 03 Jan 2005
Maintaining Compay Minutes: "An Ounce Of Prevention Is Better Than A Pound Of Cure"
By: Richard J. Crouch
Many who organize small businesses, such as corporations or limited liability companies, assume that the protection against personal liability offered by such entities is absolute. However, these benefits are not maintenance-free. Once your company is formed, it is easy to go back to business as usual and forget to comply with necessary formalities, such as preparing detailed company minutes. When properly kept, minutes constitute a record of company proceedings and should be regularly prepared for the following reasons: (i) eliminating your personal liability, (ii) proving authorization of major business decisions, and (iii) preserving a credible record for audits.
When claims are made against commercial clients, a primary concern is whether the entity formed will shield owners' personal assets from claims against the business. Since many owners are never told why organizational formalities are important, they are often at risk that creditors may be able to disregard the company's separate legal status and impose personal liability upon the owners. In the absence of current minutes, creditors will argue that the owners discounted the significance of the company's separate legal status, and that the rest of the world should justly be able to do the same. The best evidence to defeat such an action is to keep accurate minutes of company meetings.
Maintaining minutes will help confirm whether major business decisions were properly authorized by the correct individuals. This comes into play, whenever you try to (i) transfer ownership interests in the company, (ii) transfer substantial portions of company assets, or (iii) obtain financing for a company project. If not confirmed in the minutes, your attorneys will spend numerous hours analyzing company documentation to ascertain whether the action was authorized and whether all voting interests have been accounted for.
The regular preparation of minutes affords companies an opportunity to preserve evidence in their favor in the event of a future audit. If such records are prepared close to the time the company action was taken, they are usually of great value to the company, because testimony given by certain principals, which is not supported by minutes, may be viewed as inherently self-serving and given little weight as evidence.
Keeping regular minutes should be viewed as preventative maintenance that may address important issues before potential conflicts arise. If you are uncertain as to what to include in minutes, your attorney can assist you in preparing minutes and other documentation, which will help maintain the integrity of the company's form and serve as evidence that company action was properly authorized.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.