Many individuals choose to conduct their business as corporations or limited liability companies. There are tax benefits to operating those types of entities and many people take advantage of them. However, many people often forget that there are requirements that they are supposed to meet in order to withstand an audit by the IRS about whether or not the individuals who say they are corporations in fact act like corporations.
Those challenges would be whether an individual writes personal expenses out of a corporate account, whether an individual keeps accurate records with regard to the nature of the corporate expense, and the reasonableness of the corporate expense, and very importantly, whether or not the corporate shareholders have annual meetings and they record the minutes of those meetings, voting on such matters as approving budgets for the previous year and upcoming year, agreeing on the major acquisitions or sales of assets throughout the previous year, and any other significant event that either has occurred or will occur in the corporation.
When corporations have more than one shareholder, it is extremely important that the tax returns and the expenditures be voted on and verified by the shareholders annually, and should include approval of all compensation that has been paid to the individual shareholders and if the shareholders also work for the company. Salaries should also be approved so that there is some finality to this issue. We recently assisted a client whose departing shareholder objected to the manner in which the shareholder had been compensated during the entire length of ownership in the corporation. Because this company kept proper records and annual Minutes approving expenditures and compensation of employees and shareholders, the company avoided potential litigation with regard to that objection.
The corporate Minutes are not time consuming and very important to the upkeep of your business. The attorneys at Thomas Law Group are happy to assist you in the preparation of your Minutes. We suggest that you have a corporate meeting at least once a year, or at least have Minutes prepared with regard to that meeting or to record notable events of the year, and that these occur sometime either in the last quarter of the corporation’s fiscal year or in the first quarter of the preceding year.
