You’re conducting business as a corporation and various shareholders have kicked in investment money. Can shareholder inspections of corporate records occur?
With small businesses, emotions can run high. Typically, a person has a great business idea, but need investors to create a pool of cash to get the business going. In such situations, the person has an emotional attachment to the business and thinks it is “theirs.” After all, if it is my great idea, I should control it. This understandable attitude can lead to problems.
When you form a corporation and take on investors, you must be ready to let your baby go. The corporate entity is now the owner of the idea, which means all shareholders have a say in how things are run. The fact that you were the one that came up with the idea is absolutely irrelevant. If this sounds unfair, you may want to consider other ways to raise money instead of selling shares in the entity.
A corporate entity, including a limited liability company, is a separate “person” for legal purposes. This legal fiction creates a liability shield between the business and your personal assets. However, this also requires the corporation to keep records such as board resolutions, bylaws, articles of incorporation, balance sheets and so on. These corporate records should create a time line and snapshot of the corporate business for each fiscal year.
In every state, shareholders have a right to inspect the records of a corporation. The scope of the inspection depends upon the particular laws of each state, but typically covers all records in the corporate books, balance sheets and even tax returns. The shareholder must typically make a written request to see the records three to five days prior to the date in question. The lawyer and accountant of the shareholder can also view the records.
Most people react badly to shareholder inspection requests. Upon receiving a request, most will assume a lawsuit is coming and get combative. This, of course, leads to a refusal of the inspection request. Such emotional refusals are a huge mistake and violate the laws of practically every state. Shareholders have the right to inspect corporate records and you cannot deny their request.
If a shareholder seeks to inspect corporate records, you can take a few steps. First, call the corporate attorney and get advice. Second, the corporate attorney may want to be present to make sure only the legally required records are disclosed. This tactic is highly dependent on the laws of each state and involves complex strategy decisions. Regardless, the best option is to immediately contact the corporate attorney and find out your options.
If you obtain money from investors to pursue your business idea, you must understand that it is no longer “yours.” To this end, shareholders have the right to inspect the records of the business.