When you started your business, your lawyer, business advisor or your ownprior business experience most probably suggested that you form a corporation or an LLC for a couple of very practical reasons:
- Your business’s structure can provide some tax deductibility that would not otherwise be available if you operated as a sole proprietorship.
- A corporation or LLC, and some forms of partnerships, can provide you with ‘limited liability’ - i.e. a ‘corporate shield’ can limit or eliminate personal liability for the debts of a business if you follow the rules.
#1 is nice, but #2 can make an enormous difference in your personal life if the business does not do well and is unable to pay off all of its obligations. For startups or businesses entering into new banking, borrowing or vendor relationships, banks and others might well require that one or more of the stockholders personally guarantee some of the business’ obligations. However, as the years go by, many banks will waive personal guarantees, as will vendors, landlords and others who will then extend credit to your business.
Maintaining Your Limited Liability
I can tell you from the perspecitve of a business broker and M/A specialist, more than 5 out of 6 businesses that we either work with, perform valuations for, or otherwise become acquainted with, have conducted themselves in a manner that basically wipes out any prospects of the stockholders being protected by the corporate shield.
To retain the protection of your corporate or LLC structure, you have to conform to some rather simple standards, which include:
- Openly displaying and using the complete business name including acronyms such as Ltd, Inc, Incorporated, or LLC to provide public notice as to the structure of your business. This means using it on business cards, envelopes, stationery, invoices, signage, website or any other marketing piece you might develop. If you conform to this, it means that a creditor will not be able to effectively argue that they were denied the knowledge that you were not personally responsible.
- Conforming to requirements set forth in the original paperwork in your incorporation or LLC formation documents, which will typically include:
Electing Officers
Not only does this need to be done, but it needs to be documented with minutes commemorating the event, and these need to be filed in the Minute Book.
Holding Annual Meetings
Meetings require giving notices and also require minutes of what was discussed, what was decided, etc., all of which need to be recorded in your Minute Book. The same requirements apply to Special Meetings and Resolutions (see below).
Having Resolutions
Corporate Resolutions cover significant business events: In essence, when the business borrows money, loans substantial amounts of money, enters significant lease agreements, buys significant amounts of equipment, or disposes of material amounts of assets, or enters into significant contracts, the decision needs to be memorialized by a resolution showing the Board Meeting date, who attended, who voted and the agreed upon course of action. These resolutions need to be filed in your Minute Book.
Consequences of Not Maintaining Corporate Records
Failure to appropriately conduct your business and maintain these corporate records can result in the corporate shield being pierced, thus allowing one or more stockholders to be held liable for the debts of the business. In addition, when you go to sell your business, whether as a Stock or an Asset Sale, in almost all instances (absolutely certainly in a Stock Sale) the buyer and/or his legal counsel will want to see these records.
If you don’t have these records, you might want to give some serious thought to going back over the years and reconstructing the dates, times and events to memorialize them. While you are doing this, you should also make certain that your Stock Certificate Ledger (which shows who owns what shares)is up to date and verify that you know exactly where your shares of ownership are located.
The foregoing is not intended to provide legal advice, but is intended to make you aware of the importance of these issues, and if you are not up to date and current, to inspire you to take such actions as you deem advisable (including contacting your attorney) to get and stay current.
