So you just started a business and now someone is telling you that you need a record book. But why? What is a record book and honestly, does it even really matter?
The truth is, yes it does. Many entrepreneurs overlook the importance of keeping updated records after the entity is initially formed. However, understanding what records to keep is crucial to operating a successful business. Keeping these records is important for all corporations and limited liability companies, even if there is a sole owner or only a small group of people running daily operations.
Piercing the Corporate Veil
When it comes to being in business, it’s important to understand that your company is susceptible to lawsuits. Depending on where you formed your entity, some states allow for individuals to not only sue your business, but to also attack personal assets to recover damages. There are a few ways to do this, but one of the most effective ways of piercing the corporate veil is showing that the business and the owner are really the same or that the owner doesn’t practice the actual business, and in fact, uses the business purely to shield assets and avoid taxes. In this case, the business may be referred to as an alter ego of the individual. One of the easiest ways to show this to any court, is by looking at the formal business functions and records; hence, the record book. Without these documents, it can easily be assumed that since the business is not keeping adequate records, it is not acting as a true corporation/LLC, and could be using the business to hide liability.
Succession of the Business
Your record book is a valuable source for maintaining essential pieces of information and major decisions by the owners. This gives a safety for other owners and/or successors to be able to access pertinent information about the company, should the initial owner become incapacitated. This will allow the business to continue operations without any complications.
The record book should keep information such as:
- Operating agreement or shareholder agreement
- Corporate bylaws
- Bank account access information
- Approved contracts and process for approving contracts
- Employee authorized functions
- Tax election
- Purchase or sale of major assets
- Amending the articles or organization or corporate bylaws
These are just some of the items contained in a record book. Basically, any document that pertains to the functions or roles within a company should be included.
If you foresee the need to raise capital for your business, keeping good records will be vital. Angel investors and banks will definitely expect to see thorough record keeping of business operations and functions. This lets investors know that you are an active, responsible business that is operating legally. It also shows investors that you are taking the time to care for valuable documents and you are setting up your business for expansion in a thorough manner.
Sell/Transfer of Business
If you decide to sell or transfer your business, your record book will be essential for explaining the details of acceptable processes. It should also outline a valuation method and ensure that all owners agree to the terms.
Selling/transferring a business can be extremely confusing and can certainly cause conflict among owners. Having thorough documentation can prevent lingering difficulties.
When you start a business, it can be difficult to imagine that anything could go wrong or that there would ever be conflict among employees/owners. Well, it’s all very possible and happens every day. Your record book will contain documents that tell you exactly how disputes should be handled. This information will give you peace of mind as you grow your business. It will also ensure that other owners know the expected provisions for disagreement resolution.