The Importance of Keeping Good Business Records
By Lane V. Erickson, Idaho Business Attorney
One of the many things they don’t teach you about in business school or in college classes is the importance of keeping good business records. In fact, when I meet with business clients one of the first things they almost always tell me is they had no idea about the large amount of paperwork and business records that needed to be kept in order for their business to operate.
There are a lot of different types of business records that need to be kept. These include the documents that created the business in the first place which are the certificate of organization or articles of organization. They also include bylaws or operating agreements as well as minutes for every meeting that is held in the business. These also include a large variety of financial documents and bank account records. Also, let’s not forget about all the contracts that your business may be entering into with employees, salesmen, suppliers, vendors, business partners, and so forth.
Keeping good business records can solve many problems that your business would otherwise have. These include how your business is organized. It also includes the financial operation of your business. Additionally, the contracts play a huge role in the relationships your business has with its clients, customers, and others.
The purpose of this article is to describe some of the most important reasons that you should keep good business records as part of your business. However, this article is just a starting point. If you have additional questions, we encourage you to contact us for a free 30-minute consultation where we can answer your questions.Ownership Interests Are Fixed
One of the most important reasons that a written business record is needed is with regards to the ownership interest in the business. With an LLC this is controlled by the operating agreement. With a partnership this would be a contract. If your business is a regular corporation then the records of the business should include the number of outstanding shares of stock your corporation has and who owns those shares as shareholders.
By having this information as part of your written business documents you have concrete knowledge of who the owners of the business are and what percentages of ownership they each hold. This is important because it could control how the business itself is operated. For example, if the owners of the business cannot agree on what the business is going to be doing in moving forward, this could come down to a vote between the owners of the business. The votes then must be counted based on the ownership interests of each of the owners. Normally, the majority rules in making decisions.Transfer of Ownership Interests are Controlled
Additionally, the written business records will control how an ownership interest can or cannot be transferred to other current business owners or outside third parties. The reason for this is that the original owners only contemplated being in business with you. However, if you decide you want to sell your business interest to an outside third-party, your current partners may not want that to happen.
The business documentation usually controls how an ownership interest in a business can be transferred. Often there are specific limitations on who an ownership interest can be transferred to. Additionally, there are also often purchase options given to current business owners or to the business itself through a right of first refusal.
When the business records are in writing, and they have been agreed upon by all of the owners of the business, then they control how an ownership interest can and cannot be transferred. These transfers could include an outright sale, or a transfer that may occur by reason of law, say for example as a result of the divorce, or death of an owner.Individual Liability is Shielded
Corporate documents control not only how business interests are transferred but also the liability of the current owners as well. If all the corporate documents are in order, and all required formalities have been followed, then the individual owners of the business typically will be shielded from liability of the business. For example, if you have an LLC that owns residential real estate that is rented out and that has a mortgage, if the business default in the payment of that mortgage, the individual owners of the business are not responsible to make those payments.
Similarly, if some other liability arises in the business, such as a person being injured on the rental property, the individual owners of the business are shielded from the liability that could fall upon the business so long as they didn’t intentionally cause the injury or harm. In other words, the business itself may lose its assets through litigation or claims for the injury or harm, but the owners of the business are personally shielded from this liability. However, this is only true if all business formalities have been followed. The business records and documents of the business provide the evidence needed to show that all required formalities have been followed.Management of the Business is Agreed Upon
Furthermore, how the business is managed, or rather who manages the business is also controlled by the business records. Again, this would be either a contract for a partnership, or an operating agreement for an LLC, or the bylaws of a corporation. Each of these documents spells out the specific management rights that are held and who holds them.
Without these types of documents, there’s often confusion in a business organization as to who can make management decisions. This only becomes worse as the business grows and as either the operations or the number of employees gets larger. Because of this, it’s important to think ahead about how management should be controlled and then make a record of that in the applicable business documents.
If you have questions or concerns about the importance of keeping records in the type of records that should be kept for your business, we can help. We have counseled and advised numerous business owners in the creation, operation, and management of their businesses. We are confident that we can answer your questions and help you too!ENLIST AN IDAHO BUSINESS ATTORNEY TO HELP YOU
Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877-232-6101 or 208-232-6101 for a free consultation. You can also email us directly at firstname.lastname@example.org or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.