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Bloomfield Office
Three Regency Drive
Bloomfield, CT 06002
Phone: (860) 242-2221
Fax: (860) 286-0185New Haven Office
1164 Townsend Avenue
2nd Floor
New Haven, CT 06512
Phone: (203) 468-4770
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Maintaining Corporate Records to Avoid Personal Liability 07-03-2007 We maintain corporate minute books for many of our clients. Once a year we send a questionnaire to each client requesting information so that we can prepare annual minutes of the shareholders and directors. State law requires that corporations must hold a meeting of shareholders annually. In lieu of a meeting, minutes can be adopted by unanimous consent. The shareholders will elect the directors of the corporation to serve for the ensuing year. The directors, in turn, elect the officers of the corporation, typically the president, vice president, secretary and treasurer, to serve for the ensuing year. Other resolutions may be adopted, such as authorizing bonuses, setting compensation and confirming retirement plan contributions. Failure to follow the statutory requirements can lead to unintended consequences, including the possibility of personal liability of the shareholders for debts and obligations of the company. There is a considerable body of case law that holds that a creditor can “pierce the corporate veil”, i.e., look to the shareholders personally, if the required legal formalities are not followed. This is particularly true in closely held corporations where there are only a few shareholders. If the facts show a “unity of interest and ownership” between the shareholders and the corporation, the court may disregard the “shield” of the corporate structure. So, for example, failure to maintain a separate checking account for the company; using the corporate bank accounts for personal obligations; failure to maintain corporate minutes; failure to hold elections of directors and officers; and failure to file annual reports with the Secretary of State are grounds for casting aside the protection the corporation provides to limit the liability of the shareholders to their equity in the company. There are other problems that can, and do, arise in this regard. With the passage of time, officers and directors may die, become incompetent or move away. It may become difficult or impossible to reconstruct the corporate records. A prospective purchaser of the business may want to see clean corporate records, especially if the buyer is purchasing the stock of the corporation. The absence of minutes may scare off a buyer who performs due diligence in reviewing the corporate records. If the officers and directors are not elected, then the question must be asked - who is running the company? Elections are typically for one year. A lapse in maintaining corporate records may give rise to a dispute among the shareholders which, in turn, may lead to costly litigation. Failure to file annual reports with the Secretary of State poses additional problems. Whenever a corporation seeks a bank loan, the lender will demand a Certificate of Good Standing which must be acquired from the Secretary of State’s office. Unless all annual reports are filed, the Secretary of State will not issue the Certificate and, without it, the lender may not grant the loan. If any of the officers or directors are unavailable, it will not be feasible to complete past due annual reports. All documents filed with the Secretary of State must be truthful. Thus, the annual reports must accurately reflect the information contained in the annual minutes of the corporation. Finally, if the Internal Revenue Service conducts an audit of your company’s tax returns, the agent will undoubtedly ask for your corporate minute book to review your annual minutes. The IRS expects to see minutes of consecutive annual meetings of shareholders and directors from the inception of the company. The concerns expressed in this Client Alert are based upon many years of experience in representing corporations like yours. The problems raised can easily be avoided. It normally takes just a few minutes to respond to our questionnaire. You should return it promptly. Our office will prepare the minutes, which must be signed and returned. We will insert the signed minutes in your minute book, which we maintain for your benefit. We are only the custodians of your minute book. It is available to you upon request during normal business hours.For more information, please contact Attorney Martin A. Clayman.
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