What You Should Know
About Corporate Records
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In our experience, small business corporations in California regularly fail to maintain accurate corporate records on an annual basis. Instead, they “have their corporate records somewhere!”
Shareholders and small business corporations often rely on being creative when the corporate minutes are needed if they failed to maintain a complete set of corporate records as required by law.
Poor Corporate Records – Consequences
If you are already in litigation, it is not a good idea to “create” the needed documents when they are requested under pressure from a lawsuit.
When a government agency or an opposing attorney has asked for a copy of your corporate records, falsifying or “creating” information in order to prove that something happened in the past is absolutely the wrong thing to do. Once you have opened yourself up to the allegation of falsifying records, your credibility with the government or in a lawsuit is completely destroyed.
Unfortunately, it is not unusual for us to come across companies that have played it fast and loose with these processes. Small business owners often feel that it is an unnecessary cost and waste of time to track corporate activities because “it is only us” and we talk to one another regularly anyway. These companies often only feel the pain when they get into some kind of litigation.
For example, we had a recent case with an Orange County California Corporation where two partners had set up a company. Over several years, they built it into a multi-million dollar business. Once the revenues and assets became significant, the owners started to fight over ownership and control. More specifically, they fought over who had the right to make daily decisions within the company. They also disputed over what decisions were made in the past. With poor corporate records and an informally run company, it became far more difficult and, therefore, dramatically more expensive in litigation to resolve these issues.
If it turns out that a dispute becomes a lawsuit or goes into an arbitration process, the company’s corporate records become a critical resource to aid in resolving the issue.Corporate Records are simply a critical part of the process of running a company in a formal way, which is what is required in a corporation.
Generally speaking, the more a corporation formalizes and records it’s decision making process, the better run the company usually is and certainly the better it is perceived to be.
Think if you had to turn your corporate minutes over to the Internal Revenue Service. If your corporate record book was merely an empty notebook that had none of the corporate minutes and reflected none of the basic corporate resolutions, what would they conclude about your other financial record-keeping? Certainly nothing that would favor the corporation.
You do not have to pay for professional assistance with your company’s corporate record keeping. However, if you do not follow a corporate records best practice, then the corporate veil may not cover you in your hour of need.
The law allows the protection of the corporate veil to be pierced and the business owners’ personal assets to be exposed in civil litigation, if corporate formalities are not followed. The most basic of these formalities is the keeping of accurate corporate records. One reason you have a corporation is for the protection it allows to your personal assets. Don’t risk losing them because you failed to keep adequate corporate records and accurate minutes.
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