Friday, February 22, 2013

I own a small business: how detailed should my corporate records be?

Every corporation organized in Massachusetts, whether big or small, is required to “keep as permanent records minutes of all meetings of its shareholders and board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation.”  M.G.L. c. 156D, §16.01 (2012).   This may seem burdensome if you are a small family run business or if you are the only shareholder of a corporation and therefore make all the decisions.   However, the safest way to protect your business and the integrity of your corporation is to treat it like it’s a large company and keep up with all the required corporate paperwork.

If you are a small business you may not be changing officers or directors on a yearly basis, but it is still important to have an annual meeting at which the shareholders elect the directors and the directors elect the officers as memorialized in votes of the shareholders and directors, respectively.  If your company is audited or if your company applies for a loan you may be asked to provide copies of the corporate votes for the last few years.  If you have not kept up with the required corporate paperwork the audit could be prolonged or the loan could be denied. 

It is important to keep minutes from the annual directors’ meetings to memorialize decisions made, documents relied on in making a decision, and if the decision was debated.  It is not necessary to record a play-by-play of the meeting detailing what each person said, but it is important to record the substance of the decision making process and the ultimate decision.  Documenting the decision making process of the directors can also help protect the directors from personal liability in the future.  A director is not personally liable for the actions of the corporation so long as the director’s decision falls within what is known as the “business judgment rule.”  The business judgment rule protects directors, and officers, from personal liability for actions they have taken in good faith, with due care, for the best interest of the corporation, and an individual in a like position would reasonably believe appropriate in similar circumstances.  Halebian v. Bery, 457 Mass. 620, 627 (Mass. 2010).   Evidence of the director’s good faith and thoughtful consideration of a business decision may be evidenced within the meeting minutes.   

Maintaining the corporate formalities, such as paperwork, can also protect the officers, directors and shareholders from personal liability if the company is sued.  For example, your company is sued for failing to pay amounts due whether it be for products purchased or a bank loan.  If your company is not able to make payments to the debtor, that debtor will look to find additional ways to be compensated, perhaps looking to the shareholders.  If you have not maintained the corporate formalities and treated your company as a separate and distinct entity, including maintaining separate bank accounts, not co-mingling company and personal funds, and keeping up to date on the necessary corporate paperwork, a debtor may seek to “breach the corporate veil” and seek recovery from your personal assets.  While breaching the corporate veil is not easy, it is important to recognize you formed a corporation for a particular purpose, likely to limit personal liability, and therefore it is prudent to maintain the corporate formalities to limit the risk of personal liability.

If you are a small business owner and are concerned your corporate records are not complete, or you need advice concerning your corporation, Phillips Silver can help.  We have represented many small businesses throughout Massachusetts and are willing to discuss your small business needs with you.  Contact us for a free consultation.  www.pstas.com

The information you obtain on this blog is not, nor is it intended to be, legal advice. You should consult a lawyer for advice regarding your individual situation. We invite you to contact Phillips Silver and welcome your calls, letters and electronic mail.   Please note, contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.