Incomplete Records Can Become A Legal Problem By Mary Moran

By Author: Charles Drouin
Total Articles: 2
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Was the person who wrote the corporate minutes quoted above just a poor speller? Or was "duly" spelled "dully" to convey the idea that preparing corporate minutes is a bore?

Many people look upon corporate record keeping as an unimportant chore that can be postponed. It is not – just ask a Seattle business lawyer. Shareholders and directors in private corporations who fail to keep all required corporate records are risking their personal assets home, car and investments to creditors of their corporation.

How could incomplete records bring such grief? Consider:
• You are asked to produce your corporate minute book for a routine IRS audit and, because there is no documentation for loans taken from the corporation, the IRS characterizes the money as a dividend. You are required to pay additional taxes, interest, and a negligence penalty.
• A lawsuit is brought against your corporation. The attorney on the other side subpoenas the corporate minute book and is able to convince the judge that, because the corporate records are deficient, the shareholders do not deserve the protection of the corporation.

It ...
... is easy to get into the habit of letting the corporate records get behind. You figure you can always catch up, but sometimes it is too late. For instance:

• The shareholders never get around to adopting a shareholder agreement. Then one shareholder dies, and a long and costly legal struggle ensues with his heirs about the value of the stock.
• You decide to sell the company. Suddenly, you discover that there is no documentation to prove that a former shareholder was bought out.

Such serious consequences can be avoided fairly easily. First, set up a corporate minute book where you keep, at a minimum, the following:

1. Articles of Incorporation (and any Articles of Amendment)
2. Bylaws
3. Minutes
4. Agreements out of the ordinary course
5. Licenses and annual reports
6. Stock records

Second, make sure that the records are kept up to date in the following areas:

Articles of incorporation.The articles of incorporation should always be reviewed when changes are made in corporate structure, whether you change the number of directors or issue new stock. Changes in corporate statutes may require new or updated provisions. If changes are needed, Articles of Amendment must be filed with the Secretary of State.

Bylaws. Provisions in the corporation's bylaws should also be reviewed and followed. When changing the annual meeting date or the number of directors, amendments to the bylaws may be required. (Note: A completely rewritten Washington Business Corporation Act went into effect July 1, 1990, and several major updates have occurred since then, so provisions in old bylaws may no longer be in compliance with state law.)

Minutes. Annual meetings of shareholders and directors should be held each year at the time set in your bylaws. If actual meetings are held, minutes should record the date, persons attending and resolutions adopted. Remember that the shareholders elect new directors and the directors elect officers. Shareholders can vote by proxy but directors cannot. If a shareholder or director misses the meeting and proper notice wasn't given, that person must sign a waiver of notice or the meeting is not valid.

It is also possible to eliminate the need for actually holding a meeting by preparing a Consent in Lieu of Meeting which must be signed by all Shareholders and/or Directors, although less than unanimous consents by shareholders are possible if allowed in your Articles of Incorporation.

Actions that should be approved by directors include: shareholder loans, stock issuances, approval of major agreements, contributions to pension plans, officer salaries, adoption of fringe benefit plans and corporate banking or investment accounts opened. Amendments to Articles of Incorporation, sale of substantially all assets, mergers and dissolution must be approved by shareholders.

Annual Reports.Every year, on the anniversary of your incorporation, the corporation's registered agent will receive an annual report which must be filled out and sent in on time to the Secretary of State with the correct fee. If it is not, your corporation will be administratively dissolved. It is not unusual to find people operating as a corporation although their corporation was administratively dissolved a long time ago. Under the law, such persons are individually, jointly and severally responsible for all actions of the corporation.

Agreements. Fully signed copies of employment agreements, shareholder agreements and any other major agreements to which the corporation is a party should be kept in the minute book.

Stock.It is very important to transfer stock carefully and to keep a stock transfer ledger. For proper cancellation, a certificate must generally be signed off by the shareholder on the back or on an assignment separate from the certificate. When issuing stock, formalities must be addressed: securities laws, possible preemptive rights and the number of shares authorized.

While it may seem like a boring chore, the encouraging news is that a Seattle corporate lawyer can help you keep up the corporate records as you go along, which is a lot easier and less expensive than trying to recreate them later.

About author:
The Lasher firm’s Seattle business lawyer can assist you with Family Act. To avoid legal disputes regarding Family Act, contact a Seattle corporate lawyer at Lasher today. Please contact Jamie Polito Johnston at (206) 654-2412, if you have any questions about this article.