One requirement of a corporate entity is to maintain proper corporate minutes. You, your CPA and attorney may need well-documented minutes to assist your corporate entity in navigating through such things as Internal Revenue Service audits, bankruptcy or court action. Properly maintained minutes may also assist in other challenges that might come from minority shareholders, fellow directors, employees or other government agencies. Without an accurate corporate minutes book, the IRS, the courts, and other taxing authorities may allow creditors, plaintiffs, and other entities to sue you personally for debts and actions of the corporation. It is imperative that corporate minutes be properly maintained.
The primary reason your business was incorporated was to help protect your personal assets from business risk and debt. The corporation is a separate legal entity. Minutes can help shield a shareholder or officer from personal liability for corporate debt. Once this corporate shield is pierced, the officers or shareholders can be named in a lawsuit and you could be held personally liable for all debts of the business. The U.S. Corporations Code, section 1500, states that each corporation shall keep adequate and correct books and records of account. This applies to all minutes of the proceedings of its shareholders, board of directors and committees of the board. By law, senior management and the board of directors are accountable.
Minutes may assist your CPA and advisors in avoiding higher taxes or even double taxation. During an audit, the IRS scrutinizes corporate minutes for discrepancies between the corporate resolutions adopted by the shareholders and board of directors and the actions of the corporation. You may lose tax deductions and benefits if you do not conduct meetings that adopt resolutions supporting the actions taken by the corporation. Without proper corporate records, the IRS may consider the shareholders to be operating as individuals and not as a corporation. As a result, the IRS can shatter the corporate shield and impose an individual tax rate that will likely be higher than the corporate one. If a shareholder personally charges business expenses, such as travel and lodging, the IRS will try to forbid reimbursement for these expenses, while considering the disbursements to be dividends. Without explicit expense records and proper authorization in the minutes, it is possible for an owner to be subject to double taxation. Dividends are not deductible to the corporation and are taxable income to the shareholder. Most importantly, the status of a "separate legal entity" for your corporation can be discredited.
Companies should conduct routine check-ups of their business records at least annually. Corporate minutes should provide a written record of important corporate transactions including:
- Key legal, tax, and financial decisions.
- Approval of bonuses or fringe benefits, such as group term life, disability or deferred compensation plans.
- Contributions and amendments to retirement plans.
- Lease agreements and rent payments.
- Reasonable compensation for officers and shareholder employees.
- Approval of dividends from C-Corporations and distributions from S-Corporations
- Documentation of the necessary business purpose for accumulated earnings to avoid an additional 28% tax.
- Identification of directors and officers of the corporation.
- Property and equipment additions or replacements.
- Research and development programs and expenses.
- Stock transactions and repurchase arrangements that coincide with stock record books.
- Contracts, approvals of loans or financing arrangements.
- Approval of "arm’s length" transactions with shareholders.
- Corporate restructuring or mergers.
The reasonable compensation issue continues to be a hot issue for taxing authorities. A company may deduct the compensation paid to employees as long as it is "reasonable". However, the IRS may say that part of the compensation paid to a business owner (or a relative) is a disguised dividend. The corporate minutes can help establish that compensation is warranted for the services being performed.
The Ohio Department of Jobs and Family Services, has recently successfully reclassified S-Corporation distributions as compensation. These distributions were not documented in the corporate minutes. The reason appears to be to assess penalties, as high as $1,000 for under-reporting of gross wages, even though the S-Corporation shareholder has already passed by the $9,000 wages base threshold. All S-Corporation distributions should also be properly authorized and documented in the corporate minutes to avoid this reclassification to wages. Identifying officers is important for wage base determination with regard to workers’ compensation liability. Officers’ compensation is limited with regard to workers’ compensation.
There is no absolute guarantee that disputes will be settled in your favor, but the minutes should provide you with a good position to respond to these issues. It is important that your minutes are complete, accurate, and up to date.
If you should have any questions regarding this issue, please contact your corporate counsel or you may contact Steve Magovac [[email protected]] or Dan Riemenschneider [[email protected]] for more information.