The administrative chores required of a smooth business operation can be tedious and tiresome, making them easy to overlook. Though recordkeeping, documentation, and organization may not be meet your definition of “fun,” they’re certainly critical components of a successful venture – both for legal and strategic reasons.
Whether you’re setting up a corporate entity or selecting a series LLC during business formation, or maintaining an established S Corp, LLC, or other company, taking a deep dive into recordkeeping can make all the difference when it comes to laying the foundation for growth, compliance, and reduced exposure to risks and liability, and when dispute or unforeseen issues arise.
Why Recordkeeping Should be a Priority
It’s one thing to do something because you’ve been told it’s the right thing to do, and it’s another to actually understand the purpose and importance of your efforts. When it comes to recordkeeping, understanding the benefits can help businesses identify ways to improve efficiency and other critical aspects of their operations. Likewise, knowing the risks of not staying on top of records and documentation can help companies make those tasks a priority.
- Protecting the corporate veil. Limiting personal liability is one of the hallmarks of the corporate status, but it’s not impermeable or immune from various threats. It has to be proactively maintained and assessed. Clear, compliant, and consistent recordkeeping allows shareholders and other equity owners to preserve critical protections against lawsuits and legal actions that target their personal assets. Failing to follow proper protocol, comply with applicable laws and regulations, and safeguard the shield of limited liability creates the risk for court to “pierce the corporate veil,” no matter what corporate “form” you’ve chosen.
- Ensuring compliance. Corporate compliance should be a focal point in any industry, and especially those subject stringent regulatory oversite. For corporations, solid recordkeeping practices can ensure the ability to furnish needed documentation, minutes, and other records should they be requested by a regulatory authority. This may include the IRS in matters involving taxes, OSHA for workplace safety violations, federal financial regulators such as the SEC, and even various state and federal health officials that conduct audits or investigations when corporations work within the health care space. Not being able to provide the right records can pose serious consequences.
- Corporate transactions. Shareholders, partners, and other corporate owners have an interest in positioning their companies for success, which is why due diligence is a best practice in nearly any corporate transaction – including corporate reorganizations. Whether it’s a merger and acquisition, restructuring, or even a dissolution, owners should know prospective buyers or partners are likely to examine record as a means to gauge past performance and future progress. Incomplete records can compromise a deal, lowering price and profits or eliminating them altogether.
- Preventing litigation / easing the response to conflict. Even the most organized corporations can face legal action and conflict that create disruption. From disputes among business owners or partners and shareholders to contract breaches, business fraud, shareholder oppression, trade secret violations, and intellectual property litigation, the potential for high stakes conflict is abundant. With proper recordkeeping, corporate owners can effectively manage business litigation risks and access the information they need to protect their interests, or to help their attorneys help them. That’s true in terms of preventing litigation and providing recourse and options for more efficient and favorable resolution should disputes arise. A judge will take clear and consistent recordkeeping into consideration when reviewing a case.
Records to Keep: What Corporate Owners Should be Tracking
“Good recordkeeping,” in terms of specifics, can look different for different corporations, as there may be rules and regulations that vary by state and industry. These rules may also have different requirements in terms of how long records are to be kept, in what medium they must be stored (i.e. digital or physical), and other specific records-related issues. Corporations with plans to expand into other states must be mindful of the need to understand state-specific rules on recordkeeping.
Generally, corporations are subject to more recordkeeping requirements than LLCs, and may have to keep documentation such as:
- Articles of incorporation created during business formation
- Amendments filed with the state (when applicable)
- Corporate bylaws and compliance plans
- Annual reports
- Shareholder information, including class and number of shares
- Information on directors and officers
- Meeting minutes (i.e. records of decisions / actions made by shareholders or directors)
Though LLCs typically have less requirements mandated by the state (including those under Title 3 of the Texas Business Organizations Code), most states still have rules regarding LLC recordkeeping, often requiring:
- Information on LLC managers and members
- Business formation documents (i.e. Articles of organization)
- Amendments filed with the state (when applicable)
- Operating agreements
Other Important Recordkeeping Considerations
There are important considerations that should be part of a corporation’s comprehensive recordkeeping programs. A few important ones include:
- Meeting minutes. Though LLCs are not required to keep meeting minutes unless stipulated in an operating agreement, corporations are. As official records of corporate activities which directors, officers, and shareholders have the right to review upon reasonable request, minutes should be clear and complete, and concise in sticking to simple language and essential facts. Recording minutes, as with other documentation efforts, is best done when meetings occur, or as soon as possible after. They should include the standard basics (i.e. location, time, and date; attendees and absentees, agenda items and what was address, and detailed information about votes), and should be kept with other corporate records that reflect major actions, transactions, and resolutions (i.e. election of directors, stock issuance, approvals which impact the company, etc.).
- Shareholder / operating agreements. Prevention is worth a pound of cure, which is why the best way to avoid a business dispute is to prevent them from the outset of a relationship through carefully crafted agreements. These agreements may outline a number of essential business functions (from admission and withdrawals to procedures and employment agreements), and allow for resolution and enforceability when disputes do occur, bet they related to conflicts of interests or personality, misappropriation, or squeeze-outs and freeze-outs. Important areas of focus for shareholders and partners may vary by entity, but generally include sound shareholder and partnership agreements, and LLC / company operating agreements.
- Other contractual agreements. Contractual agreements can further bolster efforts to avoid business agreements. Owners should evaluate the role of creating competent, clear, and enforceable contracts such as buy-sell agreements, restriction and separation agreements, confidentiality agreements (NDAs), non-competes, and more.
Hendershot Cowart P.C. is a Houston-based law firm with a national reputation. Since 1987, our attorneys have been serving clients across Texas and beyond in a range of matters related to business law and litigation, OSHA defense, health and medical law, and more. If you have legal needs related to your corporation or business goals, contact us online or call (713) 909-7323 to speak with a lawyer.