Maintaining proper corporate formalities and record-keeping practices is crucial for a company’s good governance and legal compliance. Failure to maintain corporate formalities can remove the liability protection provided by a corporate entity, and failure to maintain corporate books and records can make any number of activities more difficult, from day to day operations, to fundraising or being acquired.
This blog post (and Part 2 of this series) focuses on corporate formalities and record-keeping practices that a typical corporation should observe. Importantly, applicable state law, bylaws, and corporate charters (and possibly other governing documents or agreements) may vary some of these practices, so corporations should be sure to pay attention to governing documents.
The base-line formalities needed are:
- Corporate Records Book: Maintain a physical or digital corporate records book, which includes the company’s charter (a certificate of incorporation in Delaware, but often called articles of incorporation in other states), bylaws, meeting minutes, and other important documents. Keep this book up to date and easily accessible. This can be a cloud-based folder or series of folders.
- Registered Agent: Appoint and maintain a registered agent in the state where the company is incorporated and in any states where the company is operating as a foreign corporation. The registered agent is responsible for receiving legal and official documents for the company, including court pleadings (i.e., lawsuit-related documents). This can be an individual or a registered agent service, but their associated address will be public, which may be an important privacy consideration.
- Annual Report Filing: File required reports or statements with the relevant state agency. These are usually required annually but sometimes biannually or at some other interval. These reports typically include updated information about the company’s officers, directors, and business activities.
- Bank Accounts: Keep clear records of all company bank accounts, transactions, and statements. Separate business and personal finances are required to maintain corporate liability protection and limit personal liability (also known as the corporate veil). Co-mingling of company money with personal money can make it easier to hold shareholders accountable for corporate liabilities (also known as piercing the corporate veil).
- Stock and Equity Records: Keep detailed records of stock or equity ownership, including stock certificates (if applicable), shareholder agreements, and records of equity transfers.
- Meeting Minutes: Document and retain minutes of board of directors’ meetings, annual shareholder meetings, and special meetings. Minutes should record decisions, discussions, and actions taken. Because these meetings are one of the more involved corporate formalities, we’ve detailed more considerations for meetings below.
- Consents and Resolutions: If governing documents allow for action by consent (or are silent and applicable law allows for this), keep written consents and resolutions for significant corporate actions, such as mergers, acquisitions, changes to the bylaws or other governing documents. Companies should document anything required by their governing documents as well as any other major decisions where they want to ensure a paper trail so as to protect against possible liability or later dispute.
It’s important to consult legal counsel and industry-specific experts to ensure that record-keeping practices align with applicable laws and regulations. Proper record keeping not only helps with compliance but also facilitates effective corporate governance, financial management, and decision-making.View all posts by this author