Many corporate clients ask why they should spend the time and money to maintain corporate minutes. This is especially common in small or family-run operations. Other corporate clients don’t even bother asking the question, they just don’t do it. When I am asked why they should go through the time and expense of preparing minutes and maintaining a minute book, my short answer is that it is required under California law.
Section 1500 et seq. of the California General Corporation Law states that, “[e]ach corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, board and committees of the board” at its principal executive offices. In addition to it being a requirement under California law, the following are some reasons why all corporations, big and small, solely-owned, family-owned or otherwise, should maintain corporate minutes and update the minute book at least annually:
To Protect Shareholders From Personal Liability. If the shareholders and directors fail to maintain a corporation’s minute book and the corporation is sued, the court could “pierce the corporate veil” and hold the shareholders personally liable for the corporation’s obligations. The court could reason that since the shareholders failed to have the corporation “act” like a corporation, that the corporation should not be treated as a separate entity for liability purposes, and as a result, the shareholders should be personally responsible for those obligations. By maintaining corporate minutes and complying with all corporate formalities, the shareholders can take advantage of the limited liability protection a corporation provides, which is usually the main reason a business is incorporated in the first place.
To be Compliant With the Law When Taking Certain Actions. Under the California General Corporation Law, certain actions cannot be taken without shareholder approval. These actions include the election of directors and amendments to a corporation’s articles of incorporation. In addition, certain actions, such as the appointment of officers, cannot take place without director approval. Further, the corporation’s bylaws typically require director approval for certain matters such as calling special shareholder meetings, filling vacancies on the board of directors and amending the corporation’s bylaws, to name just a few. Maintaining corporate minutes is essential to demonstrating that such actions were taken properly.
To Make an IRS Audit Much Easier to Manage. In the event of an IRS audit of a corporation, one of the first things an IRS agent will ask to review is the corporate minute book. If the minute book is not updated or hasn’t been maintained at all, this puts the corporation (and its attorney) in the difficult position of having to bring the corporate minute book up to date prior to the audit. Depending upon how far out of date the minute book is, getting it updated in time for the audit can be a costly and challenging endeavor.
To Support and Justify Decisions Made. Minutes serve to provide an historical record of the important transactions which have taken place during the life of a corporation, including major purchases, sales, loans and leases to name a few. Further, matters such as salaries and bonuses for shareholder employees, contributions to company retirement plans, as well as corporate dealings with its own shareholders and directors (including loans to or from shareholders and directors) should be documented and approved as part of the corporate record. Doing so is not simply a matter of good practice, it can also serve to head off challenges brought by minority shareholders and provide support, in the event of an IRS audit, for those actions that were taken.
To Protect Officers and Directors from Liability. Maintaining an updated corporate minute book can help an officer or director support the fact that they have conducted themselves properly and carried out their duties and responsibilities to the corporation.
To Facilitate Third Party Review. Banks and lenders frequently ask to review a corporation’s minute book or at least the articles of incorporation, bylaws and the most recent meeting minutes or consent resolutions of the corporation. One of the first things a potential acquirer will ask to review is the company’s books and records, including the minute book.
To Save Time and Hassle When the Need for Documentation (invariably) Surfaces. The failure to keep an updated minute book can be problematic when attempting to reconstruct at a later date what actually happened in any given year. Annually updating the minute book serves to avoid disputes among shareholders, directors and officers as to what happened, when it happened, why it happened and what was decided, which is often the case when trying to document something that took place several years ago.