Corporate minutes are essential for the following reasons:
- To protect your corporate veil. The primary reason businesses incorporate is to help protect the owners’ personal assets — home, family savings, automobiles, etc. — from business liabilities. That is because a corporation is a separate legal entity. However, the failure to prepare corporate minutes can result in the piercing of the “corporate veil” — the protection for the corporation’s owners. This means each owner can be named in a lawsuit (“alter ego liability”) and could be found personally liable for all debts of the business, as if the corporation never existed.
- Because it is the law. The California Corporations Code mandates that all corporations keep adequate and correct books and records of account. This covers all minutes of the proceedings of its shareholders, board and committees of the board. Also, the bylaws of many corporations require their board of directors to have an annual meeting. Of course, small corporations in particular often have informal “meetings” where these matters are decided. However, it is important to subsequently prepare meeting minutes or unanimous written consents (signed by all the directors in lieu of a meeting) that approve the actions. By law, senior management and the board of directors are accountable. Violations can result in harsh penalties by the Department of Corporations.
- To avoid double taxation. If you were to charge certain personal expenses, such as travel and lodging, to your company, and then face a challenge from the IRS, accurate corporate records could prove very important. The IRS sometimes tries to forbid reimbursement for such expenses, characterizing them as “dividends.” Without detailed expense records, you may end up being subject to double taxation as the money you used to pay for the expenses will be characterized as dividends which aren’t deductible and are taxable income.
- To avoid higher taxes. Without the adequate corporate records, the IRS will consider you to be operating as an individual rather than a corporation. Accordingly, the IRS can “pierce the corporate veil” and impose an individual tax rate that could be much higher than the corporate one.