When you set up a corporation or a limited liability company to shield your personal assets, that’s just the beginning.
No business owner enjoys keeping business record books…but if you don’t you could still be personally liable in a lawsuit or worse.
Why? Corporations and limited liability companies are designed to be fictitious entities separate and distinct from equity owners. In plain English, they are considered under the law to be a separate “person” from the individuals who own them. That’s what makes these entities attractive for doing business.
However, in order to maintain this separate and distinct status, your business entities have to meet certain requirements to go on “living.” This includes many things, such as filing proper paperwork with the government, paying taxes when due, and keeping necessary business records.
The types of records that must be kept depend on whether you own a corporation or a limited liability company. For example, a typical corporation will keep records of its formation, organizational meeting, notices of meetings, waivers of notice, minutes of meetings of shareholders and boards of directors, corporate resolutions, documentation regarding loans, money put into or taken out of the corporation, names and addresses of all equity owners, copies of issued stock certificates, a stock register, buy-sell agreements, shareholder agreements, and proxy agreements.
What happens if the record-keeping formalities are not observed?
• If you try to sell your business, few will want to purchase for a fair price without adequate business records.
• If you get sued, a court may disregard your business entity under “alter ego” theory and hold you personally liable for damages.
• You could pay extra taxes because you didn’t document financial transactions correctly in the business entity records.
• If caught, you may have to pay extra penalties to the government for not keeping required records.
For an example of what not to do, check out Amazon Affiliate Tax: Jerry West Has a Bad Solution.
What’s the solution?
Have your lawyer look at what you’ve got, determine what is missing, and then clean up your business records by bringing them up-to-date. This will give you a fresh start and you can put into place a business record-keeping system with your lawyer that will enable to you to add new documentation as needed in the future.
Remember that memories fade, employees quit, people move or die, and other events occur that make it difficult as time passes for you to create the necessary record books. In other words, it won’t get any easier than now to clean up your records.