If you own a corporation, meaning your business entity ends with an “Inc.” or “Corp,” then you have a company that has more stringent recordkeeping requirements and formalities than a limited liability company (LLC). That’s not to say that LLCs do not need to keep records. They do. Just not to the extent that a corporation does. You’re probably not going to be reading this for fun, so I’m going to write this with the assumption that I referred you to it. Let’s start with what the law says you need to do:
Title 26 U.S. Code - Internal Revenue Code
26 U.S. Code § 6001. Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records… as the Secretary may from time to time prescribe…”
The Secretary [of the Treasury] prescribes in 26 CFR § 1.6001-1(a) that any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information.
§ 7203. This is the criminal (misdemeanor) statute for willfully violating § 6001.
§7212(a). This is the criminal (felony) statute for corruptly obstructing or impeding the administration of the Internal Revenue Code, including by concealing or failing to maintain required records.
14 HRS § 231. Administration of Taxes
§ 231-35. Makes it a crime (misdemeanor) to willfully fail to file return, supply information, keep records, or secure a license. (The state version of IRC § 7203).
23 HRS § 414. Hawaii Business Corporation Act
§ 414-35. After incorporation, organizational meeting shall be held to elect directors, appoint officers, and adopt bylaws.
§ 414-36. The incorporators or board of directors of a corporation shall adopt initial bylaws for the corporation.
§ 414-121. An annual meeting of shareholders required
§ 414-470. Books and records.
(a) Each corporation shall keep accurate and complete books and records of account and shall keep and maintain at its principal office, or other place as its board of directors may order, minutes of the proceedings of its shareholders and board of directors. The books and records of account shall include accounts of the corporation's assets, liabilities, receipts, disbursements, gains, and losses. The minutes of the proceedings of the shareholders and board of directors of the corporation shall show, as to each meeting of the shareholders or the board of directors, the time and place, if any, thereof, whether regular or special, whether notice thereof was given, and if so in what manner, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings at each meeting…
(b) In every corporation incorporated under this chapter, the board of directors of the corporation shall cause a book to be kept for registering the names of all persons who are or shall become shareholders of the corporation, showing the number of shares of stock held by them respectively, and the time when they respectively became the owner of the shares…
§ 414-472. Annual report required.
Now that you have been properly motivated, you need to first get your documents organized. You can keep everything in a folder, or better yet, a binder. I recommend getting a customized leather-bound binder with your corporation’s name on it. You will also need a corporate seal that you use to authenticate important documents. The seal represents the authority of the corporation and has important historical and legal implications. These corporate kits can be custom ordered for approximately $100 plus shipping.
Here is a sample index I use for my business:
Above is just a sample index. Your business might not have even a fraction of the above documents. Your business may keep multiple volumes of record books. If you are a larger and more complex business, you may have many more documents than were just mentioned. You will also keep a full record of financial transactions. QuickBooks Online is the industry standard.
Now, I am not worried about the publicly traded C corporations not having their books in order? No. I am, however, worried about the one-shareholder S corporation. Why? Not because the government is going to come take you away in the night for not adopting a set of bylaws. I am worried because of the tax and legal consequences for of filing a one-page paper with the state and doing nothing more. Let’s dive into this a little deeper.
Corporate Formalities
A corporation is, legally speaking, a person. Even if a corporation is owned by one person, it is deemed to be separate from its owner, just as a child is separate from its parent. But you need to do more than file a one-page document to have the law recognize this fact. You must observe corporate formalities which have evolved over hundreds of years of case law. You must treat your corporation as a separate entity. This means maintaining separate financial accounts, adopting and adhering to it bylaws, holding regular board and shareholder meetings (even if you are the only participant), documenting decisions with appropriate resolutions, and signing contracts in the corporate name, not you personally.
Showing a court that a corporation is merely your alter ego can result in “piercing the corporate veil” of protection shielding you, as a shareholder, from personal liability for the corporation’s acts. This can result in you, personally, being responsible for the judgement of a court in a lawsuit. If you want the limited liability protection of a corporation, then you need to actively work to preserve its status as a separate legal entity.
If the IRS deems your corporation to be a “sham” because you treated it as an extension of yourself, it can lead to them disregarding its separate existence, which can lead to disastrous tax consequences. You need to get over the strange feeling of wearing multiple hats. You are a shareholder, director, president, treasurer, secretary, CEO, employer, and employee at the same time. You need to direct your corporation to elect, appoint, and hire you as director, officer, and employee, IN WRITING. Sometimes, you will draft and execute a contract with your signature on both sides of the contract, in both your corporate and personal capacities. You will hold and record, IN WRITING, board meetings, alone… by yourself. Regardless of how weird it appears, the law has benefits for those who observe these often strange corporate formalities.
I will end with a historical explanation for one example of this corporate weirdness. It has to do with the corporate seal, which is still used to this day. Legally speaking, it goes back to medieval Europe. Documents were “sealed” with a wax impression to give them their “officialness.” At first, kings would attach special double-sided pendent seals to important state documents (a practice which still exists today in the United Kingdom, see BBC Charter), which both the literate and illiterate of his subjects would be able to recognize was his. In England, only one officer of state had/has custody of the royal seal matrix to mitigate forgery. The historic punishment for counterfeiting the royal seal was death. As the centuries progressed, the use of seals moved down the social hierarchy to bishops, knights, and corporations. The common law theory was that the signature of a mere director or officer was an act done “on behalf” of the company’s agents, which had legal limitations. Whereas the corporate seal carried more significance because it was deemed to be the actual “signature” of the company itself.