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Record Keeping
Every list of pros and cons of incorporating I’ve ever seen usually lists increased record keeping at the top of the cons list. Although there is more record keeping involved with a corporation, listing increased record keeping as the top reason not to incorporate is shortsighted. Corporate record keeping is not a big deal.

To understand the reason a corporation requires more records than an unincorporated business, lets review for a minute. Remember that a corporation is a separate and distinct entity with legal rights of its own that acts for or on the behalf of its shareholders. Owners incorporate their business to allow them to act through the corporation. Although the corporation is a legal “person” it cannot act for itself. So, to allow the corporation to carry out its business, the shareholders appoint directors to manage and direct the business affairs of the corporation. The directors act like the trustees of an incompetent adult, planning and directing the activities of the corporation. Since the directors are acting in a trustee type arrangement, states require that everything done by the directors on behalf on the corporation be documented. That’s why every time a meeting is held to take action on behalf of the corporation, it must be documented, and minutes of the meeting must be recorded.

Another reason extensive records of corporate activities are kept is the shareholder. Remember that when corporate laws were originally drafted, the idea of a one or two person corporation had not been considered. Laws were originally drafted to match the textbook example of a corporation with many investor shareholders. In such a case, the shareholders, officers, and directors were all different people. Laws were written to protect the shareholder from unscrupulous directors and officers who would run a corporation broke to make themselves rich. This is another reason things must be documented and annual shareholders meetings held, to keep officers and directors honest by documenting their every move.

Of course, your corporation will probably be formed with less that four shareholders. These shareholders will probably be the officers, and directors as well. In this case, the shareholders will know the events within their corporation. Considering this, record keeping may seem like a waste but you must remember one thing. Operating as a corporation can give you great benefits, legally, and in the area of taxes too. To make sure that these abilities are not abused, states and the IRS require that you keep records of all corporate activities. Basically records must be kept of all important events within the corporation.

Here is a list of the records you must keep for your corporation. These records must be available for shareholder inspection and accordingly should be kept at the offices of the corporation in an orderly manner.

•  Minutes of all shareholder and director meetings, generally for the last 3 years.

•  Appropriate accounting records and financial reports.

•  An alphabetical list of all shareholders with their addresses.

•  An alphabetical list of all directors with their business addresses.

•  An alphabetical list of all officers with their business addresses.

•  Copies of all formal documents used to incorporate the business.

•  All written communications to shareholders for the past 3 years.

•  Financial statements for the past 3 years.

•  A copy of the most recent annual report.

•  All contracts entered into by the corporation.

•  Amendments to, or changes in the corporate bylaws.

•  Records of stock issues and transfers.

•  Promissory notes.

•  Life insurance policies held on corporate officers and directors.

 

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