In November of 2022, Pennsylvania made another major update to the Business Corporation Law (“BCL”). We have previously discussed the effect and impact the change in the BCL has on annual report filings for a Pennsylvania entity. The most recent revision makes it much easier for an owner of a company (partner, shareholder, or member) to obtain corporate records for the business and to perform their own accounting of the company’s dealings. It also makes it much harder for the company (or its controlling shareholder / member / partner) to obstruct or refuse to provide the records upon a proper demand. This blog post discusses the new rules requiring a company to make corporate records available to all owners of the company, the process one should follow to get the records, and what to do if the person in control of the company’s records refuses to cooperate.
The new change applies to corporations which have shareholders, partnerships that have both general and limited partners, and to limited liability companies. To make it easier, we saved the applicable Pennsylvania rules and made them available on our website:
- Corporations making corporate records available to shareholders under 15 Pa. C.S. § 1508;
- Partnerships making records available to partners under 15 Pa. C.S. § 8446 and limited partners under 15 Pa. C.S. § 8634; and
- Limited Liability Companies making corporate records available to members under 15 Pa. C.S. § 8850.
Which corporate records can I ask to review?
Generally speaking, a company has many different types of corporate records. There are business and financial records and an owner of a company typically has the right to review most–if not all–of them. Some of these names may differ for different types of entities. For more, review our post about the different types of business entities in Pennsylvania and differences between a Corporation, a Limited Liability Company, and a Partnership.
The types of corporate records that exist for a company are:
- Articles of Incorporation: This is a legal document that establishes a company and includes basic information about the company, such as its name, purpose, and registered agent. It may also list the officers of the company, as well as its most recent business address. This document is helpful to determine when the company was filed, where, and who (if anyone) was initially listed as an officer.
- Bylaws: These are the rules and regulations that govern how a company operates, including information about meetings, voting procedures, and the roles and responsibilities of directors and officers. Bylaws typically exist for corporations, but are less common for partnerships or limited liability companies as the roles of the partners and members are usually included in the company’s operating agreement.
- Meeting minutes: These are written records of the discussions and decisions made during company meetings, including board of directors meetings, shareholder / member / partner meetings, and committee meetings.
- Financial records: These include accounting records, such as balance sheets and income statements, as well as tax returns, invoices, and receipts. Depending on how the company is operated, QuickBooks records or bank account statements are also helpful if there is a question about the accuracy or truthfulness of the company’s record keeping practices.
- Contracts and agreements: These include contracts with customers, suppliers, and employees, as well as partnership agreements, lease agreements, and licensing agreements. As a lawyer, the first and most important agreement we ask for is the agreement between the shareholders (Shareholders Agreement), between the members (Membership or Operating Agreement), or between the partners (Partnership Agreement). Sometimes, no such agreement exists and that poses a separate problem. We discuss that in more detail in one of our LegalEase YouTube videos.
- Corporate resolutions: These are formal decisions made by the members, board of directors, or shareholders that are recorded in writing and kept as part of the company’s records. They may also be incorporated or included in the meeting minutes for a company.
- Licenses and permits: In most states, licenses or permits required for the company to operate legally, such as business licenses, occupancy permits, or professional licenses. If a company does business with the state or federal government, or if the company has to register as a professional service provider (Lawyer, Accountant, Real Estate broker, etc.) these types of licenses are important to review to make sure they are kept current and not expired.
- Insurance policies: These include any insurance policies that the company holds, such as liability insurance, property insurance, or workers’ compensation insurance. Insurance policies are important to monitor because a lapse of insurance coverage can result in a large liability both to the company and the individual owners. We cover the corporate veil and how it can be pierced in a blog post as well as in a four part video series about factors that may result in a corporate entity being disregarded–including undercapitalization or underinsurance.
- Employee records: These include information about a company’s employees, such as employment contracts, payroll records, and personnel files. If there is a question about improper payments to related parties, like paying a family member that doesn’t actually do work for the business, a company’s 1099 or W2 records will sometimes provide an answer.
What is the right to inspect corporate records?
Put simply, every owner of a company should be able to see how their company is operating and Pennsylvania’s BCL allows for a business owner to make a demand to see those records. This includes the company’s formation documents, meeting minutes and business decisions made by corporate resolution, and financial records. In fact, the BCL makes it clear that business owners are entitled to “any record” relating to the company’s activities, affairs, business affairs and/or financial condition. This is stated differently for different types of corporate entities, but overall the intent and effect and intent is the same.
For Corporations with Shareholders
In Pennsylvania, a shareholder of a business:
For Partnerships with General or Limited Partners
In a partnership, irrespective of whether a person is a general partner (one with the right to control the partnership’s operations) or a limited partner (an investor with little control over the partnership’s dealings), on reasonable notice:
Additionally, so long as a limited partner has a proper purpose, the a limited partner can review information:
For Limited Liability Companies (LLC) with Members
Similarly, in a limited liability company (also known as an LLC), regardless if it is member managed (by the members of the company) or manager managed (by managers), a member is entitled to:
What is the process for obtaining or inspecting corporate records?
This is where the updated BCL really favors the little guy (or gal). Previously, you had to make a demand and hope that the company complied. Now, there is a clear statutory ten (10) day requirement to comply. Let me say that again, each of the laws detailed above requires the company or its manager to provide the records or have a good reason for refusing. Ok, so what is the process?
First, the request has to be for a “proper purpose” or a good reason. It needs to be “reasonably related to the interest of the person as a shareholder.” Although you can’t demand corporate records for no reason, the definition is fairly broad and there is a plethora of reasons that are arguably “reasonably related” to the business owners interests.
Next, the request has to be made in writing and should describe “with reasonable particularity” the following:
- The purpose of obtaining the corporate records or documents – For example, is there a dispute about the company’s authority to do something? Is there a question about the company’s expenditures? When making the request, try to be clear about the purpose and don’t hide the ball.
- The records the business owner is asking to inspect – Try to be as specific as possible about the records being sought. Are you looking for a set of agreements or one particular agreement? Are you looking for profit and loss statements, bank statements, or for QuickBooks records?
- Explain how the records you are seeking relate to the purpose – This may be self explanatory, but it is best to provide some information about why you believe specific documents or records will achieve your purpose. If the company doesn’t cooperate, a judge will most likely review your request, so there is usually no reason to hide the ball.
Finally, the request should be provided to the company’s usual place of business, and if it doesn’t have one, at its registered office. To be safe, copy the other owners, shareholders, or members by email. However, even in the days of email, its best to send these requests certified mail with read / return receipt so that you can show when you mailed the request.
How should a company respond to a request to inspect its corporate records?
People often call our office looking for help recovering their unpaid wages. Pennsylvania employees have a right to receive fair wages and are protected under both the Fair Labor Standards Act (FLSA) and the Pennsylvania Wage Payment and Collection Law (WPCL). These laws are designed to ensure that employers pay their employees promptly and accurately for all work performed. Employers who violate these laws may be held liable for unpaid wages, damages, and attorneys’ fees. Additionally, individuals who have decision making authority regarding Employer’s wage payments can be held personally liable for any violation.
However, in today’s digital age, the reality is that most records either already have been scanned or can be easily scanned and emailed. Similarly, QuickBooks and bank statements can be downloaded and emailed.
The company can also impose reasonable limitations or conditions on access. For instance, it can designate certain records confidential and make the person asking for the records agree not to disclose them to third parties. The company can also place restrictions on the use of its records.
What can I do if the company refuses to comply with my demand for information?
If a company refuses the demand for information, doesn’t respond within ten (10) days, or agrees to produce records but then don’t, you can go to the court and get a court order. The 2022 update to the BCL makes it expressly clear that companies “shall” reply and comply with record demands, and if they don’t, the court may “summarily” order them to comply. Summarily is important because it implies that the court won’t get into a prolonged dispute about the record request and formalities. The update to the BCL is intended to expedite the process and make it easier.
Contact Kaminsky Law
Hopefully the detailed description above gives you the tools you need to get the records you need. However, if you need help, we are here. Whether you are an investor trying to obtain business records, or a business owner that just received a record request from one of your partners, we can help. We have represented parties in shareholder litigation, helped review business records, and advised our clients on the right way to proceed in all types of business disputes.
Our consultations are always FREE. Please don’t hesitate to Contact us for a free consultation! You can either fill out our website form or dial (215) 876-0800.