Don't Overlook the Importance of Appropriate Corporate Minutes
The importance of maintaining appropriate corporate minutes cannot be overemphasized. Many times, the incomplete or carelessly drafted minutes, not to mention the failure to maintain any minutes at all, open the door to potentially adverse tax consequences.
At a minimum, the minutes should ratify the election of officers and directors. In addition, common actions also include the accrual of bonuses, retirement plan contributions, and the ratification of other officer and director actions. Some potential issues for failure to maintain proper minutes include:
- Challenge by IRS of salaries as unreasonable, thereby creating a potential dividend. Proper minutes should document the reasons for the salary, including duties and responsibilities, skills, accomplishments, etc. If salaries during the early (start up) phase of the business were below market, this should be reflected in the minutes as well.
- Any earned but unpaid salary should be noted in the minutes. This may impact the value of the business in situations where there are either current or anticipated minority shareholders. Failure to acknowledge the unpaid compensation may lead to objections some time in the future. One caveat is that lenders may raise concerns about the amount of the unpaid compensation.
- While not a common problem, C corporations may be subject to accumulated earnings tax. This tax is imposed if the corporation accumulates excessive earnings inside the corporation, in lieu of paying out the earnings as a dividend. The minutes should document the reasons for the accumulation of the earnings inside the corporation, such as for capital expenditures or other legitimate business needs.
- Many closely held corporations have loan accounts between the shareholders and the corporation. Adequate documentation in the minutes can make it easier to refute the potential IRS challenge that the loan is nothing more than a disguised dividend.
- Frequently, buy-sell agreements provide for an annual value to be set by the board of directors either based on a formal valuation or a pre agreed formula. This value should be reflected in the minutes of the Board of Directors. This provision also encourages the Board to address adequate funding of the potential buyout, either by life insurance, sinking fund, etc.
- C corporations can authorize a charitable contribution in one year and fund the contribution within 2 months of the end of the year, provided it is authorized by the Board of Directors and appropriate election is made.
The annual meeting should not be restricted solely to these items, however. The meeting should be a forum for discussion of business operations, strategic planning initiatives, tax planning, and general consultation with advisors. Carefully drafted minutes are an important part of a corporation's tax records.
