Properly Maintained Corporate Minute Books Save You Time, Stress and Money
The minute book of an Alberta corporation organises and records all the legal information about the corporation. After a company is incorporated, many corporations neglect and fail to update their minute book. This is because owners are attending to the day to day operations of their business. Failing to update and keep your minute book organised and properly maintained can have significant consequences and costs for a corporation. It is important to maintain and update your minute book. Here are the top 10 reasons why it is crucial to properly maintain your corporate minute books.
(1) Validity of the Corporation’s Actions
If proper director and shareholder resolutions are not passed by the corporation, actions taken by the company may not be valid. It is important to ensure that the proper resolutions are passed by a corporation. This ensures corporate actions comply with the Alberta Business Corporations Act, the By-Laws and Articles of Incorporation. Any major or fundamental change to the corporation requires director and shareholder resolutions. The only way to know if these resolutions have been properly passed is to check the corporate minute books. The following are just a few examples where resolutions are required:
• Issuing shares;
• Appointing directors;
• Amending the Articles of Incorporation and By-Laws of a corporation;
• Changing the corporation’s name; and
• Authorising the corporation to operate under a trade name.
(2) Opening a Bank Account
When a corporation opens a bank account, the bank will require the corporation to provide incorporation documents and appropriate resolutions on behalf of the shareholders and directors.
(3) Obtaining a Loan from the Bank
The bank, when providing a loan to a corporation, typically seeks and relies on the opinion of the solicitor acting on behalf of the corporation to ensure the bank that the corporation:
• Has been duly incorporated and organised;
• Is in existence as a valid and subsisting corporation under the laws of the Province of Alberta;
• Has the requisite power, capacity and authority to borrow from the Lender; and
• The security agreement granted by the bank does not conflict with the corporation’s Articles of Incorporation, By-Laws or resolutions.
If the minute book is not up to date, a lawyer in Alberta acting on behalf of a corporation cannot provide the bank with the assurances above. Ultimately, this will delay the corporation’s ability to obtain a loan. Further, there are times where not having a maintained corporate minute book prevents the loan from happening at all. In some cases, this will lead to the requirement of the corporation to secure a much more expensive loan.
If Canada Revenue Agency audits your corporation, it is essential to have an up-to-date and maintained corporate minute book. If you have engaged in tax planning but have failed to paper the proper resolutions for your corporation, you may be exposed to higher taxes, tax penalties and fines. For instance, failing to properly record dividends can result in shareholder dividends being treated as income. Income tax is taxed at a higher rate than dividends. In addition, the inability to prove the proper corporate issuance of dividends in the minute book can lead to penalties being assessed.
(5) Annual Returns
Each year a corporation must file an annual return. This return is filed with the provincial government. It advises of any changes to the directors, shareholders or address of the corporation. If a corporation’s minute book is unorganised and/or fails to file their annual return, they may be exposed to strict penalties. It is important that the records maintained by the corporation are kept up to date.
(6) Selling Your Company
If you decide to sell your business, the buyer’s lawyer will want to view the corporate minute book to ensure the corporation is properly incorporated and organised and that the minute book is complete. If the minute book is not up to date and/or is missing records, the transaction may be delayed as you will likely be required to update the minute book at your own cost in order for the transaction to proceed. Some share sale transactions will not move forward due to poorly maintained corporate minute books.
(7) Shareholder Disputes & Audits
If the appropriate resolutions have not been passed or recorded properly by a corporation, minority shareholders can dispute the corporation’s decisions which will likely result in a costly audit of the company. Further, there are times where these disputes will end up in court. Not having properly maintained corporate minute books can lead to disputes over the issuance of dividends, shares, shareholder loans, and more.
(8) Director Protection
There are specific rules regarding the disclosure of a director’s interest in contracts or transactions with the corporation. There are also rules around holding a corporate office or property which might create a conflict with duties as a director. It is crucial for directors to issue a declaration of any possible conflict. Further, the directors of the corporation who vote for or consent to a resolution authorising certain actions contrary to the provisions of the Act are jointly and severally liable to the corporation to make good any loss or damage suffered by the corporation as a result thereof. Lack of knowledge by a director does not avoid this liability except in certain circumstances. To avoid liability, a director must ensure his or her dissent is recorded. If the corporate minute book and records are not organised and up to date, a director could be liable regardless if he dissents.
(9) Potential Investors
If you are seeking to raise capital from investors by issuing shares, these potential investors will likely want to examine your corporate minute book to determine whether they want to invest in your company. By performing their due diligence, they want to know who owns what percentage of the company, what rights their potential shares have and view the history of the company. An unorganised and outdated minute book may deter potential investments.
(10) Cost to Fix Corporate Minute Books
The cost to have our team maintain your minute books is nominal. The cost to have the minute books reviewed and fixed is much more expensive. The Government of Alberta has strict guidelines on maintaining the key corporate documents. Corporations may have legal costs to update unmaintained corporate minute books in the thousands of dollars. This is in contract to a couple hundred dollars for annual, ongoing maintenance.