First of all, a quick reminder: July 15th is this year’s due date for federal taxes, pushed back from April 15th due to the upheavals caused by the coronavirus, so get in action now, if you are not already, to get your taxes prepared and filed.
Today we’re talking about the importance of keeping meticulous records of everything your business does. It may be a little late for you to apply these practices to your 2019 business taxes, but that doesn’t mean you can’t get your upcoming records in ship-shape as soon as possible, and do better going forward.
Good record keeping definitely isn’t the flashiest or most exciting part of your business. In fact, it can be downright tedious. However, it is far more tedious to dig around through your files, email, meeting minutes, statements, and calendars for the information you need to complete your taxes, get access to capital, or defend your assets, if necessary.
The possible consequences of not keeping good corporate records should be enough to inspire you to cover your bases. First, if you ever end up in a lawsuit, you need to be able to prove to anyone who files suit against you that the “corporate veil” is in place. The “corporate veil” is like an invisible, yet strong, shield between your personal assets and the activities of the business. It’s this shield that makes it so you won’t be personally liable and have to use your own assets to pay back debts or other obligations of your business.
The first step to creating a “corporate veil” is to have a business entity, such as a corporation or a limited liability company (LLC). But, just having a business entity is not enough. You need to separate your personal financials from the financials of the business. And, you have to keep great records of that separation, and the activities of the business.
Remember that just having a corporation won’t completely protect you from being personally liable. If you are sued, and a court determines you didn’t actually separate your personal and business activities properly (because, for example, your corporate records are not up to date), the court could “pierce the corporate veil” and your personal assets would be at risk. Here are some of the things you need to make sure you have to maintain your corporate veil:
- Separate bank accounts for your business and personal activities, so you’re not commingling funds;
- Use of your business account for only business expenses, and your personal accounts for personal expenses;
- An up to date operating agreement or bylaws, annual meeting minutes on file, corporate resolutions for key activities, and clear agreements between your business and vendors, clients, and team members.
There are also very practical reasons to keep detailed records beyond protecting yourself and your personal assets. You should also have your records in order so you can provide information to the IRS about any corporate filings or decisions.
In general, you will want the following:
- Articles of incorporation for a corporation, or articles of organization for an LLC;
- Amendments filed with the state (such as if you change the name of your business);
- Names and addresses of directors and shareholders for a corporation;
- Names and addresses of members and managers for an LLC;
- Meeting minutes with documentations of any major decisions made.
Meeting minutes aren’t merely notes—they serve as official records, especially when resolutions, votes, and asset transactions are part of the picture. Internal, long-term decisions like ones regarding health plans, 401ks, or building leases, and raises should be noted. They’re just as important as financial decisions like electing corporation tax statuses, and sales and acquisitions. Be sure to include who attends the meetings, the number of votes for any outcomes, what’s on the agenda, and, obviously, when and where the meeting occurred. These don’t have to be filed with the states, but they are important to have on hand if you are asked for evidence that a particular decision was approved.
Having complete records also will be very helpful if you ever decide to sell your company or when you seek capital for your business. You wouldn’t want to buy a house, then discover it’s got problems with its foundation. Similarly, nobody wants to buy or fund a business only to later discover that the business wasn’t performing as well as originally thought. If your records don’t show a complete picture of your business’s past, you might have to sell it for less than you’d like, or worse, you may have trouble selling it at all.
Your business could benefit immensely from the LIFT Personal Business Records Binder, which not only is a place for you to keep your records in order, but a guide to keep you from leaving anything important out. You’ll be able to have confidence that you’ve got everything you need in one place, and it will make all your financial and tax-related work go that much more smoothly. Ask us how you can get one and how you can best use it to keep all your important documents in order.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.