Why You Should Maintain Corporate Records

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About 35% of all businesses are established as corporations or limited liability companies (LLCs). The principal advantage that a corporate entity such as an LLC provides is personal liability. In other words, the corporate entity acts as a shield, protecting the owners’ personal assets from any obligations of the business; the owners cannot be held personally liable for any judgment against the business. Of course there are exceptions to this rule.

The exception is known as piercing the corporate veil. This mean that under certain circumstances, courts will allow the imposition of personal liability on owners for the obligations of their corporations. Most often, parties try to pierce the corporate veil by showing improper conduct such as fraud, demonstrating that there was a disregard for the corporate entity and for corporate formalities.

These are other important factors that courts consider when determining if the corporate veil should be pierced:

  1. a failure to adhere to corporate formalities,
  2. inadequate capitalization,
  3. commingling of assets and
  4. use of corporate funds for personal use.

And those factors bring us to the message behind this posting and why a good September activity is to update corporate records. While insufficient on its own to pierce the corporate veil, the failure to adhere to corporate formalities (which includes maintaining regular meetings or drafting minutes in lieu of meetings and amending the articles of organization or the member control agreement) is an argument that has been successfully used along with other factors to pierce the corporate veil. Thus, it is a good reason to update your business records and make sure that everything is up to date.

If you are mixing your business and your personal assets by writing checks for your dry cleaning or your personal vacations out of your business accounts, the fact that is another factor that courts consider when deciding to pierce the corporate veil is reason enough to stop immediately.

The September lesson and activity for you: take your surge of autumn energy to draft up minutes for the last years, memorializing any changes such as loans taken out or changes in management or the board of governors, and updating the articles of organization to reflect your business today, not when it was started. If you don’t have any corporate records, talk to a business attorney and get some drafted. It is an investment in the stability of your business and personal life. Finally, get your financials in order if they are not. Get the bookkeeping up to date and become vigilant about keeping business and personal separate.


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