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By: Kun Zhao, Esq.
Registering a limited liability company or corporation in New Jersey is an easy task. However, after establishing a legal entity, many business owners focus on running the day-to-day operations of their businesses and forget about the tasks necessary to maintain the corporate status of their legal entities.
Most business owners understand the benefits of incorporating their business. However, few really understand the importance of documenting corporate key decisions and keeping full corporate records for purposes of maintaining the corporate status of their businesses. When disputes arise among the shareholders and directors, and with the IRS and creditors, many businesses are surprised to discover that their corporate status has lapsed due to their failure to (1) hold annual shareholders and directors meetings and (2) properly maintain corporate records. Additionally, many businesses fail to issue stocks to their shareholders, creating ambiguities as to ownership interest and percentages amongst the principals.
The consequences of failing to address such issues are significant. Failure to properly document important tax decisions and elections can result in loss of crucial tax benefits. When issues arise with the IRS, it is difficult to prove anything without proper corporate documentation. When a corporation has only a few principals, it will often be involved in transactions with those principals in their personal capacities. Without documentation concerning such matters, legal issues associated with claims of self-dealing by shareholders may come back to haunt the principals. Businesses may also lose their status as limited liability entities and their principals may be held personally liable for corporate debt due to poor documentation.
On the other hand, properly documenting corporate decisions and keeping detailed records will help businesses: (1) enjoy the protection and benefits of corporate status, such as limited liability and tax flexibility; (2) prevent shareholder disputes; and (3) protect principals from liabilities.
A corporate entity does not need to record mundane business decisions, such as daily transactions and the marketing of new products and services, etc. However, corporate entities should document major matters, such as the annual meetings of directors and shareholders, the issuance of stocks, transactions involving substantial assets or property, significant loans, self-dealing transactions, and important tax elections. Although formal in-person meetings are ideal, meetings can be held and decisions can also be made through e-mail, fax, video teleconference, etc. When decisions are made at corporate meetings, written minutes for those meetings should be prepared and approved by the directors or shareholders. Most states also allow directors and shareholders to approve a transaction or decision without a meeting by just executing a form that documents their approval.
Maintaining detailed documentation about major decisions will insulate corporate entities from liability when their decisions are challenged by the IRS, creditors, directors or shareholders. In most instances, investing a small amount of time to document decisions will go a long way towards avoid legal disputes.