Why Is It Important To Maintain and Update Corporate Records?

The main advantage of a corporation is to protect the shareholders’ personal assets from the obligations of the corporation. The corporation acts as a shield, protecting shareholders’ personal assets. However, in some situations courts will ignore the corporate entity status and hold shareholders personally liable for the obligations of the corporation. This is known as “piercing the corporate veil.”

Some factors that courts look at when determining whether to “pierce the corporate veil” are: (1) Failure to observe corporate formalities; (2) Absence of corporate records; (3) Using a corporation bank account to pay for personal obligations; and/or (4) Undercapitalization.

Most lawsuits to “pierce the corporate veil” are filed against smaller, closely-held corporations and the corporate veil was “pierced” in 40% of those lawsuits. While the failure to maintain or update corporate records is insufficient on its own to “pierce the corporate veil”, it is an argument that has been successfully used along with other factors to hold shareholders personally liable.

So, it is important to maintain and update corporate records to avoid these potential problems in the future. Depending on your situation, you should create by-laws, issue stock, maintain and update corporate minute books and hold regular board meetings with all directors. For help on maintaining or updating corporate records or for more information, please contact Scott D. Simpkins at (216) 621-8484 or sdsimp@climacolaw.com.