Record-Keeping For Your Business: Why Is It Important?
Whether you are a 1-person limited liability company (LLC) or corporation or one of many owners in an LLC or corporation, proper record-keeping is important for many reasons. It is more obvious from a tax-standpoint that keeping detailed records is critical to maximizing expenses and deductions, but there are legal reasons as well.
One important benefit of a limited liability company, a corporation, a limited liability partnership, or other similar entity, is the liability protection afforded to the individual owners. If your LLC were to be sued, in theory your personal liability should be limited to your investment in the LLC and the remainder of your personal assets should be protected from judgment. To keep this liability protection intact, you need to treat your business entity (LLC, corporation, LLP, etc.) as separate and distinct from yourself. If you do not treat the business entity as separate, then you may open yourself up to personal liability for business-related debts, judgments, etc. through a concept known as “piercing the corporate veil.” In other words, if you want to be treated like a corporation (LLC, LLP, etc.), you must act like a corporation (LLC, LLP, etc.).
Fortunately, there are some good business practices involving record-keeping that can strengthen the liability shield afforded by your business entity. These practices include, but are not limited to:
- Keep separate financial records for your personal life and the business (for example – separate bank accounts, separate bank ledgers, etc.) and do not intermingle personal and business funds.
- Keep personal assets and business assets separate, including titling business assets properly with the formal business name.
- Always identify the corporation (LLC, LLP, etc.) as such when transacting business, advertising, etc.
- Maintain corporate records by properly documentation all major business-related transactions, decisions, etc. For example, if the business is going to purchase a new piece of equipment or take out a business loan, document that the purchase or loan was properly approved (pursuant to the company By-Laws, Operating Agreement or other operating document). Company actions may be documented through preparation of a Written Action of Minutes of Action.
- When any party is signing on behalf of the company, they must include the company name and their title.
- Maintaining ‘good standing’ status with the state of origin by filing any required annual documents and paying any required annual fees.
This list is not exhaustive and these are just some of many factors that will be considered when determining if the corporate veil will be ‘pierced.’ How can Fremstad law help? To name a few services we offer- we are here to review your current company documentation practices, assist with proper documentation of company actions, assist with annual filings, review and/or prepare contracts, among any other assistance your business might need.
Please call us to discuss your business needs. We are here to help. 701-478-7620