Many who organize small businesses, such as corporations or limited liability companies, assume that the benefits of such entities are absolute. One of these benefits is the complete separation of the business from an business owner’s personal net worth. However, these benefits are not maintenance-free. Once your company is formed, it is easy to go back to business as usual and forget to comply with necessary formalities, such as preparing detailed company minutes and resolutions. When properly kept, minutes constitute a record of company proceedings and should be regularly prepared for the following reasons: (i) reducing exposure to personal liability, (ii) proving authorization of major business decisions, and (iii) preserving a credible record for audits.
When claims are made against commercial enterprises, a primary concern is whether the entity formed will shield owners’ personal assets from claims against the business. Since many owners are never told why organizational formalities are important, they are often at risk that creditors may be able to disregard the company’s separate legal status and impose personal liability upon the owners. In the absence of current minutes, creditors will argue that the owners discounted the significance of the company’s separate legal status and that the rest of the world should just be able to do the same. The best evidence to defeat such an action is to keep accurate minutes of company meetings. Business owners across America will create a business entity and forget to keep track of their decision-making process on paper.
Maintaining minutes will help confirm whether major business decisions were properly authorized by the correct individuals. This comes into play whenever you try to (i) transfer ownership interests in the company, (ii) transfer substantial portions of company assets, or (iii) obtain financing for a company project. If not confirmed in the minutes, your attorneys will spend numerous hours analyzing company documentation to ascertain whether the action was authorized and whether all voting interests were taken into account. Why is this important? If a decision is made and it is not documented that the other owners involved in the business consented to it, it can be deemed the decision was not one that was agreed upon and can become void. Which can cause a major setback for the business if it already began preparations for making that decision/vote become a reality. This is very costly. It can also lead to a break-up and disputes among business owners.
Also, the regular preparation of minutes affords companies an opportunity to preserve evidence in their favor in the event of a future audit. If such records are prepared to close to the time the company action was taken, they are usually of great value to the company, because testimony given by certain principals, which is not supported by minutes, may be viewed as inherently self-serving and given little weight as evidence.
As a short primer to assist the novice business owner with the substance that comprises meeting minutes, here is a tip, stick to the five W’s: who, what, where, when, and why.
Who: Minutes should always list who is in attendance and in what capacity (e.g., invited guests and their professional affiliation). If directors, officers or employees attend only a portion of a meeting, the specific portion should be noted too.
What: Minutes should describe what subjects the Board (or committee) or Members discussed and provide a sense of the deliberation. Effective minutes should reflect the agenda and any actions that were taken during the meeting. If the Board received presentations from staff or outside advisors (such as lawyers or investment managers) those presentations should be noted and their key elements summarized, but need not be described in exhaustive detail. References to comments by legal counsel should be reviewed from the standpoint of privilege and confidentiality, and it is generally advisable for counsel to review any portions of minutes where legal topics are referenced.
Where: Minutes are generally not public documents and do not need to be filed with the state or elsewhere. Unless disclosure is required by law (i.e. Florida’s “sunshine laws”) minutes should be maintained as confidential and housed in a secure location (whether in physical form or online). This is consistent with the general (and too often disregarded) fiduciary duty that directors have to maintain the confidentiality of Board deliberations. Minutes generally should not be circulated to non-directors or staff. If any slide presentations or ancillary documents are referenced in minutes, those documents should also be saved with the minutes. In addition, organizations may wish to house executive session minutes separately from ordinary minutes.
When: Minutes should be written and approved in a timely fashion. Memories fade and the more rapidly the minutes are written and approved, the more credible the record may be. In addition, certain federal and state regulations require the creation of a contemporaneous record.
Why: Minutes generally should succinctly explain the reasons key or complex decisions are made, but they should not read like a screenplay. Unless directors or officers request that particular statements be included in the record, it is fine to broadly summarize the matters discussed, topics addressed and questions asked. Avoid elaborate “he said, she said” recitations. As a general rule: don’t put any detail in minutes that you wouldn’t want to read in the newspaper or made public on the news.
Keeping regular minutes should be viewed as preventative maintenance that may address important issues before potential conflicts arise. If you are uncertain as to what to include in minutes, your attorney can assist you in preparing minutes and other documentation, which will help maintain the integrity of the company’s form and serve as evidence that company action was properly authorized. Keeping company records in a corporate book/manual also leaves the business with a single location to access and store documents to avoid misplacement and disorganization of recorded minutes. Preservation will be important if a legal claim does arise simply because of the failure to maintain and track minutes.