In my March 11th review of Inc.’s article “The Importance of Corporate Minutes” you read, “Typically, after the new entity is established. . . the owners often put off dealing with many tasks necessary to running their new corporate entity.”
Another quote from that featured article: “Ignoring the care and feeding of your corporate entity is foolhardy. * * * * Even worse, the fact that you have ignored your own corporate existence may result in its being similarly disregarded by the courts, with the risk that you may be held personally liable for corporate debts.” (Emphasis added.)
Attorney Jonathan Bush and PilieroMazza PLLC contributed an article to JDSupra’s website entitled “Corporate Record-Keeping and Compliance, or “Do I really Need to Hold a Shareholders’ Meeting If I am the only Shareholder?”
That article brings “the importance” closer to home for you as a closely held small business owner who neglects your corporate records and minutes book duty as a director and shareholder.
Addressing Mr. Bush’s title’s inquiry, “Do I really need to hold a shareholders meeting if I am the only shareholder?” In other words, do I really need to hold meetings with me, myself, and I? Alone? The authors reply: “Yes, you do.”
Both corporations and limited liability companies (LLCs) have internal and external organizational and record-keeping requirements that vary depending on the state of incorporation or organization. For example, corporations are typically required to hold an annual meeting of shareholders and at least one annual meeting of the board of directors. Actions taken at these meetings should be recorded and kept in the minute book of the entity.
[See for example California Corporations Code section 600(b) (et seq.) calling for annual meetings of the shareholders to elect directors, among other things.]
Regarding LLCs, I’ve talked with a lot of you folks who think your limited liability company (LLC) shouldn’t need to bother to hold meetings (regular, special, or annual) of either the managers (if the LLC is “manager-managed”) or members.
That may be the case, but it probably depends on your individual circumstances.
For instance, if you have an operating agreement, that document might require calling and convening regular, special, or annual meetings of the managers or members. It might be silent about any need to hold meetings, perhaps by granting full authority and decision making power to the members or managers; or to one member or manager; or to certain specific members or managers. You’ll want to read and follow the terms of the operating agreement. Notice if it requires any sort of meeting for any reason.
No operating agreement? Most of the authority I’ve read indicate it is prudent to always have a written operating agreement. Even for a single-member member-managed LLC, though that is a particular discussion for another time.
I looked at the Nevada Revised Statutes for LLCs (NRS chapter 86). It’s interesting to note their reference to “records” in NRS 86.241 which is captioned “Maintenance of records at principal office in State or with custodian of records; right of members and managers to obtain or examine records.”
NRS 86.241-2 reads:
“Each member of a limited-liability company is entitled to obtain from the company…”
“(b) True, and in light of the member’s stated purpose, complete records regarding the activities and the status of the business and financial condition of the company[.]”
And,
“(e) Other records regarding the affairs of the company as is just and reasonable under the circumstances….”
NRS 86.242-7 reads:
“The rights of a member to obtain or a manager to examine records as provided in this section may be restricted or denied entirely in the articles of organization or in an operating agreement adopted by all of the members or by the sole member or in any subsequent amendment adopted by all of the members at the time of amendment.”
You will notice the statute references “records” in several places, which in my thinking is a strong indication that your LLC should probably have some.
If a new member is added to or withdraws from your LLC, a written record of that event would likely contain the terms of their membership, including their capital contribution, voting rights, whether or not their interest is an economic interest only or a full membership interest, etc.
Other business decisions may also be recorded due to preserving the details of a transaction or because a third party requires certain documentation. I’m thinking here of a real estate transaction where a lender or a title insurance company would require a copy of the company’s minutes and resolutions that authorize the purchase or sale of a parcel; or that authorize and commit to getting a purchase money loan with formal designation of the individual who is authorized to negotiate the terms and sign the loan documents (promissory note, deed of trust, etc.).
So, in that respect, you can see that an LLC may, in fact, need to keep written records of major decisions, acts, commitments, and the like.
And, I suggest the form of such written records could be as company minutes: minutes of the proceedings of the members or managers with specific resolutions formalizing their acts and decisions. All written up, signed and filed chronologically in a standard minutes book.
I also notice NRS 86-286-1 speaks of an operating agreement that may be adopted by “unanimous written consent” of the members, which may be in any “tangible or electronic format….” Written consents are usually maintained in the company’s minutes book. I see definite implications here.
So there.
Depending upon the structure, business, management, and operation of your LLC, you may want to consider keeping formal written records of all company meetings, minutes and resolutions, including written consents, whether in tangible or electronic format. Even though an LLC may be somewhat less formal than a standard for-profit corporation, keep good records
Or, as one attorney wrote in a legal opinion I read many years ago, “…over document.”
Our subject article under review today continues:
LLCs typically have more relaxed internal management requirements; however, keeping an accurate record of the meetings of the members (or meetings of the managers in a manager-managed LLC) is just as essential as in a corporation.
There are more or fewer risks with a lot of matters related to your business organization; however, in many instances, such risks may be effectively managed. The author submits that some of the “real risks on equity owners” of an LLC or corporation include:
- Personal liability for debts of the entity: Most business people understand that the reason you form a corporation or an LLC is for protection from personal liability for the debts of your business. This protection may be lost, however, under a legal theory commonly referred to as “piercing the corporate veil.” Most clients will probably not be surprised that equity owners of an enterprise have been held personally liable in cases of fraud or other intentional wrongdoing, but this is not the only scenario where a court has held that the corporate veil may be pierced. A failure to follow corporate formalities has often been cited by courts as evidence that the entity was a mere fiction and, therefore, the shareholders of the enterprise should be held personally liable.
- Legal requirements: In somestates the corporation or limited liability company laws require enterprises to keep adequate records of shareholder and board proceedings. Failure to do so in these jurisdictions runs the risk of statutory penalties for noncompliance.
- Documenting “interested” transactions with equity owners: If there is more than one equity owner of an entity, it is critical to formally document business arrangements between one of the equity owners (or his or her relatives) and the entity (e.g., leases of property, loans, or compensation arrangements). If the minutes of a shareholder or board meeting reflect that the arrangement was discussed and represents terms that are fair to the entity, it is much less likely that a non-interested shareholder or director will be able to challenge this arrangement in the future.
- Preparing a business for sale: Poor record-keeping can also jeopardize potential exit transactions. Prospective buyers of a business will want to examine an entity’s corporate records in addition to its accounting information. If these records are poorly maintained or nonexistent, a potential purchaser is likely to insist on an even more thorough due diligence examination of a target. Once an agreement in principle is reached, any delay in getting to the signing and closing of definitive documentation is a delay that puts the deal at risk.
There are other “risks of failing to keep up-to-date corporate records” – the above list is not exhaustive.
I also remind you that, as in a corporation, if you are principal, it very well may be your duty to make and keep timely corporate records. Or else you might find it is your (and your family’s/partners’/investors’) personal ass[ets] on the chopping block.