Caring for Your Business Entity: Regular Maintenance is Critical

Posted on July 27, 2017 at 2:55 pm

Forming a business entity – whether it is a corporation, a limited liability company, a professional corporation or association, a professional limited liability company, or other form of entity – is an important milestone. However, after the entity is formed and completes its initial operations, you may forget about maintenance of the entity because you are busy doing what you do best – running and growing the business operated by the entity.

But forgetting to keep up with such maintenance may cause you to lose the benefits you sought when you first chose to form the entity – remember those? Asset and liability protection, tax advantages, so on. Failure to properly document and memorialize important decisions and elections can not only result in a loss of crucial tax benefits, but also be used as evidence to support an allegation that you have ignored the entity’s separate existence and therefore any asset and liability protection benefits you sought when you first chose to form the entity may be disregarded by the courts. This may put you at risk for being held personally liable for legal claims against the entity and for entity debts. And, with the passage of time and the fading of your memory, if there is no written record of important decisions, you may forget who agreed to what and under what conditions. Indeed, differences in the memories of the entity’s owners (the entity’s shareholders, members, or partners depending on the type of business entity) or the entity’s decision makers (the entity’s directors, managers, and so on) are a frequent and fertile source of controversy and dissension – particularly in closely held and family entities.

One of the most effective ways of avoiding the problems described above is to consistently use written minutes and consents to evidence the important decisions of the owners and the decision makers. Quite simply, your first and best line of defense against losing the benefits of having the entity is to prepare and maintain adequate records.

You may not need to document routine business decisions – such as purchasing supplies, hiring low-level employees, and so on. But key legal, tax, and financial decisions should be documented by your entity’s decision makers and occasionally, your entity’s owners. What kinds of decisions should be considered key? The proceedings of annual meetings of your entity’s decision makers and owners, the issuance of ownership interests to new owners and the redemption or transfer of ownership interests to past owners, the purchase of real property, the approval of a long-term lease, the authorization of a significant loan amount or substantial line of credit, the adoption of a retirement plan, and the making of important federal or state tax elections — these, and other key decisions, should be documented in the event that such decisions are ever questioned or reviewed later by owners, decision makers, creditors, the courts, or the IRS.

Frank Leffingwell & Associates, PC guides our clients throughout the life cycle of their business. Call us at 512-246-3040 to schedule an appointment.