Why do we spend so much time and energy on updating corporate records? Soon after the entity is created, business owners move on to growing their business and often fail to pay attention to the details of maintaining proper corporate records. As a non-priority item, these tasks get pushed down and forgotten until an event occurs for which they are needed. What kind of events? Common examples include opening a new bank account, obtaining a loan, selling the business, being audited by the IRS, a partner dispute, litigation, divorce, death or disability. All of these events will entail a review of the business entity’s records and if not properly maintained, may result in unintended, or bad outcomes for the owners.
Reviews of corporate records can be broken down into two categories. Annual items, such as reviewing government records, annual meeting minutes and five-year review items which dive into more long term issues such as the corporate structure and succession plan. The remainder of this article breaks down some of the more important items you should review in each category.
ANNUAL ITEMS TO REVIEW
- Is the company in good standing with the Arizona Corporation Commission (LLCs, Corporations) or the Secretary of State (limited liability partnerships)? While LLCs do not require an annual filing in Arizona, Corporations and limited liability partnerships need to file annual reports. Failure to file annual reports will impact the liability protection of the entity. Filing inaccurate reports can cause confusion and bad results for the owners, it can even give third parties leverage in a dispute.
- Is the information filed with the Arizona Corporation Commission or Secretary of State current and does it match the State’s records? Officers, shares, and addresses all change with time. Failure to update records can lead to fraud, missed communications, ambiguity over control or authority and potentially dissolution.
- Are your tradenames and other intellectual property updated and protected? Tradenames must be renewed every five years. Failure to renew will cause the tradename to be lost and potentially unprotected. Registered tradenames allow for greater protection if your business intends to grow nationally or internationally.
- Are the annual certificates of value updated and signed? These certificates set the valuation of the company upon certain triggering events. Having outdated valuations can lead to your interest being transferred for less than adequate consideration, or worse, litigation among the parties.
- For corporations, have you documented the annual meetings of the shareholders and directors and put them in your minute book? Annual meetings are one of the factors that determine whether a creditor can pierce the corporate veil and hold shareholders personally liable. It is also going to be the first thing a banker, buyer, IRS agent or creditor is going to request. Having these documents updated regularly ensures you will have them ready, prepared correctly and without a fire drill upon the happening of one of the above events.
FIVE-YEAR ITEMS TO REVIEW
- Do the entity’s tax returns match your corporate records? Today, a limited liability company can be taxed as corporations, S-corporations, partnership or even disregarded altogether. The operating agreement should describe how the entity is taxed and have appropriate language for that tax classification. Do the owners listed on your IRS Form K-1s match with the ownership records of the entity?
- Does your corporate structure make sense? The structure of your entities should take into account your income tax, estate tax, creditor protection and administrative efficiency objectives. Weighing your alternatives and making simple changes to your structure can produce administrative savings, enhance creditor protection and minimize your income and estate tax obligations.
- Are your valuation and triggering events current in your shareholder’s agreement or operating agreement? Formulas or fixed values created years ago could create unintended consequences that favor one party or another. Furthermore, circumstances may change and the triggering event should be modified to accurately reflect the intentions of the parties.
- Standard contracts. Are your contracts with third parties such as customers, vendors and independent contractors up to date? Do they match your business practice? Is there a system in place for preparing, signing and storing the agreements so they are available when needed?
Many times business owners avoid these questions because the answers are difficult. However, if it is going to be hard while the owner is alive, guess how much harder it is going to be after an event, when the parties know which side they are on. DeAngelis Legal can provide solutions, even in the most difficult of situations. Call us today to get your corporate records reviewed and updated.