Q. I recently formed my own business. Do I need to maintain a formal record book? If so, what purpose does it serve and what records must I keep, compile, and maintain?
A. Understanding record keeping responsibilities is a critical but often overlooked element of running a business once the entity is formed and the venture is off the ground and running. Careful attention to the business’ financial and operational records is an obvious consideration for virtually all business owners. However, it is only one piece of the business’ record keeping duties, even for corporations and limited liability companies (“LLCs”) in which a sole owner or a small group of owners also manages the day-to-day affairs of the business.
The New Hampshire Business Corporation Act enumerates certain documents that all corporations must keep on file and available for review by shareholders. Single shareholder, single director corporations are no exception to this record keeping requirement. While the New Hampshire Revised Limited Liability Company Act does not contain the same record keeping mandate, all LLCs should maintain a record book as a matter of sound business practice.
Diligent record keeping serves several other important purposes. Foremost among them is preservation of the independent existence of the business entity separate and apart from that of its owners. Though courts are generally reluctant to “pierce the corporate veil,” if a court determines that the owner and the business are actually one and the same or that the owner is abusing the business entity merely to shield himself from liability, it may disregard the independent existence of the entity and hold that owner personally liable for the debts and obligations of the business. Maintenance of corporate formalities is one factor that courts look to in making this determination.
Liability concerns aside, a well-maintained corporate record book may also be essential where business owners seek to raise capital through offerings of debt or equity, sell or transfer the business, resolve disputes among the business’ owners, or submit to an audit by state or federal taxing or regulatory authorities.
While the precise contents of a company’s record book will inevitably vary based on the type of entity and the complexity of its capital and internal governance structure, there are certain documents and records that all businesses should have on file and update as necessary. These records include: (1) the business’ formation documents (including the articles of incorporation and bylaws for a corporation, and the certificate of formation and LLC operating agreement for an LLC); (2) meeting records and governance documents, including annual and special meeting minutes and any resolutions, votes or actions by written consent authorizing the business to enter into specific transactions or engage in certain activities; (3) copies of all annual reports filed with the New Hampshire Secretary of State; (4) records of the owners’ stock or membership holdings, the names and addresses of all shareholders (or members in the case of an LLC), and copies of any stock or membership certificates; and (5) agreements affecting the entity, including any merger agreements, stock purchase agreements, asset purchase agreements, shareholders’ agreements, or voting agreements.
These records can, but do not have to be, filed in the leather-bound, gold-letter embossed binder commonly associated with a traditional “corporate record book.” But more commonly, a 3-ring binder that can be purchased at any office supply store will suffice. Alternatively, a business may store corporate records on a computer hard-drive, on a flash drive, or even in “the cloud,” so long as the records are capable of conversion into paper form within a reasonable time. Regardless of the form in which they are stored, business owners should take care to ensure that all records are secured in a safe place and updated regularly.
Brad Melson can be reached at [email protected]
Know the Law is a bi-weekly column sponsored by The McLane Law Firm.
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