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New clients often ask us: “Why should I do formal minutes for my business? Lots of lawyers don’t bother, and I have been told preparing annual minutes is an unnecessary expense.”  Not so!  If the business formalities are not observed, no matter the form in which you do business, you are exposed to liability as an individual.  Such liabilities may include contract claims, claims for injuries to customers or employees, business tax liens, and other claims against you personally as a shareholder, limited partner, or LLC member.

Protection against assessment of personal liability for claims is important.  Even if you have comprehensive liability and/or professional liability coverage there are limits to the kind and amount of coverage available.  A corporation, Limited Liability Company (“LLC”), or Limited Partnership (“LPS”), is a legal entity with an existence separate from its owner or owners, and while this fact may shield your personal assets from liability, it will do so only if the formalities required to maintain the entity’s legal status are observed.  If those formalities are observed,  anyone with a claim or lawsuit is required to look to the assets of the entity for satisfaction, and may not pursue the owner(s) personally for recovery.

You may purchase professional or product liability insurance for your practice or company, but you cannot be sure that the amount of coverage available will be enough to protect you, and you must also consider the possibility of a lapse in coverage if you or your responsible employee misses a premium payment.

There is a means other than insurance available to protect against personal liability. That is to make sure the legal formalities required by applicable law for your business are observed. Keeping up to date company records, including formal minutes on a regular basis, is a relatively cheap price to pay for the additional protection provided against claims.  The process of preparing regular minutes on an annual basis is an easy way for your lawyers to keep in regular contact with you, providing an annual legal “checkup” for your business to head-off problems before they arise.

Corporations Code §314 provides that written minutes of any meeting are “prima facie evidence of the matters stated therein. . . ,” and are admissible in evidence to establish the validity of the corporation if suit is filed to set aside the legal protection afforded by the entity. The same statutory protection is not specifically available to an LLC or LPS, but keeping detailed regular records at least annually for your LLC or LPS should provide protection.  This is because the records are admissible in evidence to show that you respected the separate nature of your LLC or LPS, and thus help to exclude your personal assets from recovery in the event of a judgment.  For corporations, as well as other business entities, such records can be crucial to avoiding personal liability if your insurance lapses due to employee error, or the policy limits are exceeded by the amount of the claim.

Preparing annual minutes also means the IRS is less likely to charge you personally, or look to your pension, profit sharing, or other retirement plan, to assess penalties if you are late to file or fail to make a required filing.  Please call (310) 826-7900 with questions.