Corporate recordkeeping doesn’t get the attention it deserves. Most business owners look at corporate recordkeeping as a chore that can be put off for when things are slower – which they never seem to be – and then it’s done in a slapdash manner that doesn’t really help.
However, good corporate recordkeeping is vital to your small business. Here are just a few real-life examples:
It protects against founder disputes
Two friends form a business together. One contributes 80% of the capital, the other contributes 80% of the labor. After two years, the capital contributor wants to sell the business and keep 80% of the sales profit. The labor contributor contends that they were always meant to be 50-50 partners. There are no documents laying out capital contributions (both cash and in-kind), no description of how profit and losses are to be allocated, and now the friends are in a dispute, jeopardizing the sale.
It protects against ownership claims
A couple is in the process of getting divorced and the wife makes substantial claim against her soon-to-be ex-husband’s business. She testifies that she had helped come up with the business concept, was integral in its early start-up phase, performed work on its behalf throughout the years, and therefore should be considered a 50% owner. Obviously, her husband has a very different story. In the end, the court decides in absence of any documentation to the contrary in the business leaving both parties in a precarious position.
It protects against prior shareholder claims
A woman inherits a substantial estate that includes a family business. Her brother, the “black sheep” of the family, was involved in the business at its start. However, he had a falling out with the father twenty years prior, left the state, and has had nothing to do with the deceased father or the family business during that time. The father leaves everything to his daughter. The son doesn’t contest the will. Instead, he challenges the transfer of the entirety of the business to his sister. Since the corporate records had never been updated from his early involvement, he was still the 50% owner on the certificate of incorporation. Dad’s will couldn’t give away what he didn’t own. Now the brother and sister must either find a way to work together, or one of them sell to the other.
It protects against forgotten founder claims
Three friends go out to lunch for a month and talk about a great business idea. They share ideas for a brand, marketing, how the product will be made, pricing. Then, life interferes, and one of the friends gets busy with their day job, family, anything. The other two friends keep going forward and ultimately launch a company. It does everything the three ever dreamed it would. And now the forgotten founder, friend three, returns and claims one-third of the business. Now, instead of focusing on expanding and growing, the two friends are fighting to keep their equity.
It protects against fraud
A company’s board of directors meets regularly each quarter to go over its performance and plan for the next quarter and beyond. By requiring the CFO to circulate company financials prior to the meeting, and the ability to examine them, the directors are able to track the performance of the company and ensure that no financial misappropriation is taking place.
It protects against employment-related claims
A family business has five employees. Every year it gives out year-end bonuses and raises to the workforce. The owner’s son enters the family business, and his skillset is the same as one of the employees. That employee is let go. The employee counters with a discrimination claim, saying that he was terminated due to his race. The claim is defeated when the business produces it annual records showing that not only was the employee not treated unfairly, he often received the highest bonuses and raises each year and received the same benefits. Instead, his position was the son’s area of expertise – as supported by the son’s degree and work history – and his position was no longer needed.
It protects during a governmental audit
During an IRS audit, the examiner questions certain business expenses that are rather large. The business owner refers to the corporate record book which records the votes to incur the expenses, the rationale behind them, the selection of the vendors, and the payment plans. The business is able to defend the legitimacy of the expenses and they are allowed, saving substantial tax dollars.
Some records are simply required by law
In addition, New York State requires good records for the formation of a business. For corporations, a corporation is not properly formed until it has filed with the Secretary of State, recorded organizational minutes, elected a board, appointed officers, issued stock and adopted bylaws. For limited liability companies, proper formation requires the filing with the Secretary of State, publication of formation, and adoption of an operating agreement.
These are just a few examples of how corporate recordkeeping can protect your business. It’s your company. Keep it that way.
To make it easier, LOVE LAW FIRM has a Corporate Record Program. Click here to get our free "TAPAS Method to Good Corporate Recordkeeping" for tips on how to maintain your records, and our "Guide to Corporate Recordkeeping" to learn more about how we can help protect your small business.