Why Corporate Maintenance Is Important
What Is Corporate Maintenance?
Corporate maintenance is the practice of complying with the record-keeping requirements a country or a regional government imposes on a corporation. As the name implies, corporate maintenance is necessary for business entities that are legally considered “corporations,” so sole traders (or the country equivalent) and, in some cases, partnerships may be exempt from corporate maintenance requirements.
The specifics of corporate compliance differ significantly from country to country and, oftentimes, within a country (for different jurisdictions). Understanding what corporate maintenance constitutes in the countries and regions you are operating in is an important part of responsible corporate governance, and failure to do so can have negative consequences for the business.
Why Is Corporate Maintenance Important?
Corporate maintenance may contrast for different countries, but in most cases, it entails the following:
- Conducting the requisite number of board meetings for the year and taking minutes (as stated in the bylaws or mandated by the region the business is operating in.)
- Updating the company’s information (and providing the necessary documents) every year or whenever a significant change happens (like a board member leaving) with the local and federal government and taxation entities the business is registered with.
The two tenets of corporate maintenance above may seem to have diluted its importance to corporate record keeping, but proper corporate maintenance is quite important and when not observed as it should (in accordance with the requirements of the country/region you are operating in), can have dire consequences for the business.
There are several reasons why corporate maintenance is important, and most of them are associated with compliance. When seeking corporate maintenance services, Aadmi’s extensive experience and expertise in managing these operations can ease your organization’s transition into a new global market and the requirements that follow.
Safety Against Fines and Penalties
As a compliance-related issue, the most basic negative implication of not keeping up with proper corporate maintenance is the fines and penalties a business might incur. In some countries and local governments, failure to submit your annual reports and update the records in compliance with the local corporate governing bodies can result in fines ranging from mild to hefty.
In other countries, there might be other penalties as well, like an audit, revoking certain rights, etc. Apart from posing a set of operational challenges, these penalties can also damage the company’s reputation and standing with regulatory bodies and shareholders.
Protection Against Dissolution
If a business fails to comply with the necessary record-keeping requirements in the jurisdictions, they operate in impose, the consequences can be significantly direr than mere fines and penalties. Regulatory entities can become suspicious about the legitimacy of your business if you fail to conduct the required number of board meetings and submit the meeting minutes to the requisite regulatory authorities. And if you have expanded into other markets, your business might be more vulnerable to these suspicions.
If the regulatory bodies equate your lack of proper corporate maintenance with an illegal business entity/organization, they may take the extreme step and dissolve your corporation. This is not the norm, but even the fact that dissolution is possible or under review can significantly harm your business.
Investors and business partners may maintain their distance from your business, and you may lose potential clients. Even if you can set up a different business entity, restoring confidence (especially in a foreign market) and regaining the trust of vendors and business partners may become difficult.
Protection Against Personal Liability
This is the most extreme situation that may arise from inadequate corporate maintenance. One of the main reasons for choosing a corporation as a business entity is to benefit from the liability protection it offers to business owners/stakeholders. That’s the so-called “corporate veil,” which prevents individuals from being personally liable (financially or legally) for the actions of the company. However, if improper record keeping and not complying with the country’s/local government’s requirements lead relevant authorities to deem your business (or certain activities) as illegal or even shady, legal authorities may decide to pierce the corporate veil and hold individuals like board members and c-suite executives personally responsible.
Strong Legal Stance in the Case of Litigations
Compliantly run board meetings and their records can also help board members and the business itself with a better defense in case of litigation. For example, if a corporation is sued for negligence and it can prove that it had identified the issue and taken proper steps to rectify the matter internally, it can significantly take the edge of the potential legal repercussions. Similarly, if shareholders or a few board members file a lawsuit while misrepresenting the facts, the board meeting records might help clear them up. And on the opposite end, poor corporate maintenance can give hostile entities leverage in litigations.
Another benefit of proper corporate maintenance and keeping comprehensive records is the potential for transparency. Organizations with proper corporate maintenance can offer adequate transparency to potential shareholders, business partners, or consumers if deemed necessary or helpful for the business. This helps maintain a positive image and shows that the business has nothing to hide, which is essential in building trust.
Important Part of a Healthy Exit Strategy
Compliant and comprehensive records can also help when you are trying to sell your business. If you are leaving a market and plan on selling your business to local buyers or even your competitors, they ideally shouldn’t have any complaints about record keeping. Good record keeping and transparently provided legal disclosures will help in the negotiating and final sale process by ensuring both parties are at the table with full access to all relevant information.
When operating in other countries, Aadmi can be your global expansion partner to help you navigate local record-keeping compliance and impeccable corporate maintenance, schedule a free consultation today.