What is Business Records Maintenance?

Corporate maintenance is the practice of making sure a corporation has all of the appropriate meetings, that the notices for all shareholder meetings follow state regulations, and that all corporate records are properly kept and stored. Because there are so many different things to keep track of, we often help with corporate maintenance issues. For example, we help by alerting corporate officers that a shareholders meeting needs to take place or that LLC members likewise need a members meeting. We help complete and submit the annual report to the state. We can also help write up the minutes for shareholder meetings and record important decisions by the board, company officers, and LLC members. Wink Tax Service helps ensure that the corporation’s renewal fees are paid on time and that the corporation remains in good standing with the State. Corporate maintenance also means making sure that the corporation is safe from attacks from creditors and plaintiffs that allege the corporation is a sham because it doesn’t follow all of the legally required corporate formalities.

Why Does Corporate Maintenance and

Compliance Matter?

When you fail to properly maintain your corporate records, file annual reports, and hold regular meetings as required by state law and IRS rules, you put your company and your shareholders at risk for significant problems. Companies that do not follow good corporate maintenance practices risk: • Dissolution of the corporation • Creditors piercing the corporate veil • The Corporate veil being pierced during litigation • A variety of IRS issues • Not being able to consummate a sale or merger at the going market rate Failure to properly maintain corporate records and to hold legally mandated corporate meetings could result in a court, the IRS, or the State to find that you are not a legitimate corporation. This type of finding can be legally and financially devastating for the shareholders and officers of the corporation. Every corporation should have an attorney making sure they stay in compliance with state laws that govern corporate formalities such as shareholder meetings, annual reports, and the minutes of shareholder meetings. The consequences of being out of compliance are too severe to ignore.

Dissolution of the Corporation

Corporations are creatures of state law. The state decides what is required before a corporate charter will be issued. And, what the rules are for maintaining the corporate charter. Having a corporation provides shareholders with a lot of benefits. Typically, shareholders are not personally liable for corporate debts, taxes, or other financial obligations. Shareholders cannot be sued for the actions of the corporation. Most States requires that corporations file an annual report every year. If a report is not filed, the company may be dissolved by the state. This puts all of the corporation’s assets at risk and could put the shareholders in financial and legal jeopardy. The law also requires that corporations have annual shareholder meetings and that the company keeps notes of the meetings. Failure to comply with these requirements could cause the state to dissolve the corporation or to revoke the corporate charter, which in effect would mean that the corporation never existed. These drastic consequences are easy to avoid if corporate records are properly maintained and all corporate formalities are properly observed.

Piercing the Corporate Veil

One of the most severe consequences of corporate maintenance and compliance failure is the piercing of the corporate veil. This means that a court has decided that the corporation is not a true company, but is instead just a sham to try and hide assets from creditors. When a judge allows for the piercing of the corporate veil it opens up shareholders to being personally liable for the debts of the corporation. It also removes legal protections that keep the shareholders and officers from being sued individually for the actions taken by the corporation. The piercing of the corporate veil renders all of the financial and legal protections of the corporation useless. It also effectively ends the life of the corporation. Courts are usually reluctant to pierce the corporate veil. However, when companies have failed to properly maintain their corporate records and hold the required meetings, it is easier for courts to pierce the corporate veil and to allow plaintiffs and creditors to personally sue corporate officers and shareholders.

IRS Problems

When the IRS performs a corporate audit one of the things they are interested in is making sure that the corporation is a real company and not part of a tax avoidance scheme. This is especially important in closely held companies. When there are no corporate records, or the minutes of meetings are vague and irregular, the IRS may get suspicious. If the IRS finds that the corporation has not been holding the appropriate meetings or keeping the appropriate records, it may find that the corporation doesn’t count as a corporation for tax purposes. This will have several devastating consequences. First, it can open up shareholders to personal liability for the tax debts of the company. The IRS has sweeping powers to garnish accounts, place tax liens on homes and cars, and to seize assets to pay tax debts. A finding by the IRS that the corporation is a sham, could expose previous years’ corporate tax returns to review. The shareholders may lose the tax benefits associated with owning a company. Money that was once taxed at capital gains rates may be taxed at the much higher personal income tax rates. If the IRS finds that the corporation is a sham, it is the officers and shareholders that will feel the brunt of the IRS’s tax enforcement practices.

Exit Strategy Issues

If you ever want to sell your business or merge with another company, part of the other side’s due diligence will be to lookup your annual reports and to survey your corporate records. If you are not able to timely produce, full and accurate corporate records, it may be a red flag to your potential partner or buyer. They may decide that doing a transaction with you is too risky and could call off the deal. They may also decide that because of the risks created by your poor corporate record keeping they will only proceed with the deal at a greatly reduced price. Few companies will be willing to assume your debts if your assets are vulnerable to attack from plaintiffs because of poor record keeping practices. Until you can sort out your corporate records and compliance issues you may left without a clear exit strategy from your business.

Divorce and Final Estate Issues

LLCs and Corporations can help shield a business from divorce. Assets could be titled in the business entity potentially shielding them from consideration as personal assets in a divorce proceeding, particularly if the business was created prior the marriage. Bad, missing, or a lack of business records opens the door exposing the business and business assets to potential loss. Additionally there is the possibility of severe tax consequences such as loss of S-Corporation tax status. Today's decisions also affect the future owners of the business and heirs/beneficiaries of the decedent’s estate. Current and complete business records help maximizes value and minimize income/estate taxes. Depreciation recapture, Step up in basis of stock and/or assets, Sec. 754 adjustment, Sec 743(b) basis adjustment, asset sale vs stock sale, as well as current and updated business records play a vital role. If the entity is structured as a C corporation, the prospect of double taxation remains a consideration for the beneficiaries. Often, the liquidation of a closely held C corporation is accomplished via an asset sale rather than a stock sale. The sale of the corporation's assets potentially cause income taxes to be paid at the corporate level (where there are no favorable capital gain rates), leaving less funds available to distribute to the beneficiaries.

Bankruptcy Issues

Business owners can file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy, depending on the business’s debt levels and financial situation. A Chapter 7 filing typically ends in the liquidation of the business, with the assets distributed among creditors. A Chapter 11 or Chapter 13 filing usually ends in the reorganization of the business’s debts, but the company can continue operating. Filing for bankruptcy has many requirements such as staying current on tax return filing as well as Corporate and LLC records. Why limit your options with bad, missing or outdated records? Please call us at (248) 816-1220 or 800-276-8319 to set up a free consultation. Or Book Your Consultation here: We service clients worldwide.