Tuesday, August 21, 2018

Small Business Blog: The importance of keeping and maintaining records in a business

By Joseph Kang 

Every great business comes with great responsibility. It’s not a verbatim quote from our former president, but regardless, it’s true. Consistent and accurate recordkeeping, while not glamorous, is essential to running a smooth business operation. By maintaining proper documentation of your business’s operations, transactions, meetings, and members, you will be well equipped to handle the rocky waters when they come. 

In the event of lawsuits and claims against your business, records can be used to maintain your corporate veil and the shield of limited liability. By keeping good business records, you are actively protecting your limited liability so that your personal assets stay safe. Accurate records and bookkeeping can serve as concrete evidence and proof to combat any claims against you or your business. Having no records in your business is a recipe for disaster in a court proceeding since you cannot support your argument with any evidence. Business records demonstrate that your business is following proper corporate formalities and shows courts that the business is a legitimate one. 

It is also vital to keep track of your finances to make sure you can make accurate financial statements. Accurate financial statements provide information about the financial state and cash flows within your business. With this information, your business can submit accurate tax filings and make appropriate payments to the IRS. File your tax returns properly because submitting inaccurate tax returns places your business on the shortlist for an audit.

Financial statements also can be used to monitor the overall financial growth of your business. It can help you make educated economic decisions, and you can allocate your resources more efficiently within the business. Good financial records will reveal how your business is doing financially and will alert you of any shortcomings and losses before it takes a serious toll on your business. 

Keeping and retaining certain business records is also a law that all businesses must follow. For instance, in the state of New York an LLC must retain and maintain the following records and documents at all times:

  1. Formation and Organization Documents: This includes the Articles of Organization, Operating Agreements, and Affidavits of Publication and Certification of Publishing.
  2. Correspondence from the State: Any document filed with or received from the state concerning the LLC.
  3. Financial Documents: A copy of federal, state, and local income tax returns from each year. A copy of financial statements from the last three years.
  4. Documents Related to the Internal Operations of the LLC: These documents can range from a copy of meeting minutes to an LLC member’s rights related to voting. Basically, all internal events, agreements, and decisions must be documented and filed.
  5. Records of Members and Managers of the LLC: These documents must include all full names and addresses of the members and managers of the LLC as well as their contributions and shares of profits and losses.

These documents can be saved as a physical copy. In New York, they can also be saved as an electronic copy provided that the electronic copy can easily be printed.

Keeping records can seem like busywork, but it is necessary for protecting your business in the long run. Documentation provides you with concrete proof of the business’s decisions and the representatives’ authorization to make decisions on the business’ behalf. Sometimes you or banks, investors, or regulatory agencies will need to see the documentation by which a decision was carried out. And by establishing good documenting habits with your lawyer early on, you will never need to look for, create, or amend documents at an urgent moment.

Joseph Kang is a student at Purdue University. He will graduate in May 2019 with a B.S. in Pharmaceutical Sciences. His college career consisted of being involved with his fraternity and campus organizations such as Purdue Dance Marathon for Riley’s Children’s Hospital and College Mentors for Kids. Joseph has experience working in a medical clinic—helping patients and clinicians as a medical assistant. Joseph plans to pursue law school after graduation. While interning with Kimberly Shin Law Firm PLLC, Joseph researched and wrote articles to help small business owners and entrepreneurs with legal challenges their businesses may face. 

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