When you form an LLC or a corporation with a commercial formation company, you’ll usually receive as part of the package a fancy-looking fake leather binder, sometimes with a heavy metal document sealer thingy. Often, this binder sits on your shelf, gathering dust, doing you and your company absolutely no good. There are many reasons to have a corporate book, but the two most important, in my humble opinion, are for business succession and litigation planning.
Your corporate book should contain all significant pieces of information relating to the company and records of major decisions by the company owners. If a business owner is somehow incapacitated, or made otherwise unavailable, the second in command can refer to the book to find where the bank accounts are, what insurance policies are in place, when the lease expires, and who gets dibs on the stash of office supplies. Okay, that last one was a joke. But seriously, maintaining a corporate book facilitates more seamless transitions between business owners, enabling the business to carry on in the event something happens to one of the owners.
I’ve said it before and I’ll say it again – if you’re in business, chances are very good that you’ll one day be sued. Sometimes the lawsuit is total BS. Sometimes it isn’t. Nevada law (NRS Chapter 86) protects business owners from being personally liable for the debts or obligations of the business. Where the business itself has few assets to attach in a lawsuit, the plaintiff will try to get the court to pierce the corporate veil and hold the business owners personally liable for whatever transgression gave rise to the lawsuit.
One of the most effective ways to get a court to pierce the corporate veil is to prove that the business was simply the “alter ego” of its owners. This concept refers to a business owner who incorporates simply to hide assets, avoid taxes, and who has no true business or who carries on the business activities just as a formality. One of the telltale signs of this type of situation is nonexistent or inaccurate corporate records. This is often true of “shell” corporations, which are often marketed as a way to shield a company from liability. Courts are willing and certainly very able to pierce the corporate veils of these entities to find the assets.
This is why it’s important to maintain your corporate book.
Stay tuned for: What types of records should be in my corporate book?