THINGS TO KNOW ABOUT UPDATING YOUR CORPORATE RECORDS
We regularly prepare numerous corporate updates to many Corporations’ Corporate Minute Books through the corporate updating worksheet for the ease, and convenience of our clients. The worksheet is executed concurrently with the Corporation’s Directors and Shareholders consent in writing in a Record and Memorandum of Action. With both documents there is no need to have formalized meetings.
The importance of the information requested on the corporate worksheet is discussed below.
Importance of Corporate Minute Book Updates to Avoid Liability
Since a corporation speaks through its records, it is prudent for corporations to keep timely and detailed books and records. Corporate books and records affect the future of the Corporation to bring and defend legal actions; effecting possible mergers, sales of stock or assets, or other reorganizations or acquisitions; protecting assets; complying with tax, securities, and other regulatory laws; and resolving disputes with or among shareholder, directors, officers, and employees.
Disregard of the corporate existence by failing to observe corporate formalities, i.e., failing to hold directors’ and shareholders’ meetings, and adopt resolutions authorizing officers to act for the corporation, can cause the corporate “veil” to be pierced, and impose personal liability on shareholders and directors.
The importance of keeping the Corporation’s Corporate Minute Book updated should not be underestimated.
Closely held corporations are not too formal in their day-to-day operations—formality could even interfere with effective functioning of the business. Directors, officers, and shareholders are usually the same few people. They are in contact daily. They might easily agree on a capital expenditure during a chance meeting at the office or shop. But even if the formal procedures of large corporations seem out of place in closely held corporations, holding annual meetings and recording formal corporate minutes offers significant legal and financial protection.
Accurate and complete Corporate Minutes can produce real tax savings.
The IRS keeps a sharp watch on closely held corporations. Corporate minutes can provide an excellent, and sometimes the only, defense against unfavorable tax consequences.
How corporate minutes help: Corporations often enjoy a favorable tax rate compared to their owner’s personal rates. They also benefit from deductions and credits that an individual or unincorporated business cannot get. But to get all the tax benefits due you, make business decisions to show sound business purpose and intent. Your corporate minutes are proof of your good intentions, should the IRS audit you.
The Importance of Updating Information Regarding Capital Acquisitions and Loans That Are Outside the Scope and Course of Ordinary Business
The Record and Memorandum should memorialize all significant capital acquisitions outside your Corporation’s usual course of business, and any loans given by or to the Corporation outside of general credit transactions made regularly to conduct your business. The IRS could view these transactions as taxable compensation or dividends unless properly recorded. Once again, the IRS is less suspicious of tax evasion when corporate actions are properly taken to approve expenditures, especially if such action is taken before the transactions occur. Carefully review your records and include all information on the worksheet.
The Importance of Documenting Loans or Sales to or from Insiders
Insiders of the Corporation include Officers, Directors, and Shareholders. Verify on the worksheet the officers and directors who will serve, or continue to serve, in which capacities. Also designate any newly elected directors or officers on the worksheet.
Corporate minutes verify that loans made to executives are loans, and not taxable compensation or dividends. They also confirm the nature of such corporate largesse as gifts to individuals (such as the surviving spouse of a deceased senior executive). Since the IRS considers intention in business actions, your minutes can show you had sound business motives from the start.
Remember, however, that loans from the corporation to employee-shareholders must meet other criteria. Nothing in writing, including the minutes, will likely win the day if your loans appear to be dividends. If you fail to repay them, pay interest on them, provide collateral, etc., the IRS will likely rule the advances are dividends.
The Importance of Documenting Raises and Bonuses of Officers who are Also Shareholders
Because of tax law changes and judicial decisions on these matters, corporate minutes, with receipts, invoices, and correspondence, serve as evidence in several important areas. Your minutes should show that any salary increase or bonus for an executive or officer has been formally approved and ratified by the board or directors. The basis for a raise, bonus, or other compensation should be noted. Minutes should include factors that justify a raise or bonus such as expanded job duties and/or time, contributions to company growth, and the need to match competitors’ salaries. The minutes should also describe the job and what the salary increase will be.
The IRS must be satisfied that salary increases, bonuses, and loans are not really dividends in disguise. Dividends cannot be deducted from corporate income as expenses like salaries, although bonuses and loans can. Ideally, we also recommend that if you determine a raise or bonus should be given to an officer, the Record and Memorandum be approved before granting it.
Such information satisfies the IRS and the courts to show that the compensation is reasonable, and the increase is legitimate. With this information, the IRS is less likely to suspect you are using a raise to disguise a dividend. Both dividends and compensation are taxable to the recipient. But dividends, unlike compensation, cannot be deducted by the corporation.
Whenever bonuses are paid to officers, provide us with the amount, nature of the bonuses paid, and when and to whom the bonuses were paid so we may disclose the information in the Record and Memorandum of Action. Indicate a reason for the bonuses. Please remember this for future reference and complete the worksheet confirming this information. Also, please verify whether the Corporation gave any raises.
Remember, it is better to have your Corporate Minutes drafted to authorize raises or bonuses before they are given, rather than after, and it is better to have your corporate minutes drafted for such authorization after the fact, rather than never.
The Importance of Trying to Predict Future Bonuses Before Distribution
When you determine bonuses and raises prior to implementing them and prior to the end of the fiscal year, the IRS is less likely to view the distributions as dividends in disguise. Dates of the minutes supporting the increase can be extra protection. The minutes can show the decision was made and implemented well before year-end earnings could be accurately projected. Large raises or across-the-board increases granted close to year-end when earnings are high often appear to the IRS to be dividends in disguise.
This is why we recommend you approve the total bonuses for this year in advance. By approving the total cash allocated for bonuses in advance, the IRS will be less inclined to view year-end bonuses as disguised dividends. If you would like to memorialize the payment of future bonuses to officers , please contact us to discuss how we may do this to best fit your needs.
The Importance of Identifying all Shareholders and Outstanding Stock
Often when updating records, we learn that stock transfers have occurred without mention in the Corporate Records. By verifying outstanding stock matches what your accountant has reported to the IRS and what your records indicate, we can better protect your Corporation if an IRS audit occurs, better facilitate any future asset sales or acquisitions which the Corporation may contemplate, and better prevent shareholder litigation and disputes due to inaccurate or poorly kept stock ledgers. If stock has been issued by the Corporation, repurchased by the Corporation, or if any other change in stock ownership has occurred, we must know of it so the Records may accurately reflect such transfers.
The Importance of Documenting Declared Distributions
Your corporate minutes also play a part in determining the taxable nature of dividends. A dividend paid out in stock isn’t taxable to the shareholder until the stock is sold. Dividends paid in cash or property are taxable income in the year they are paid. But if shareholders can choose taking a dividend in stock or in cash or property, the dividend is taxable to them no matter which method they elect to use.
To settle such tax questions (and get the best tax results for you), your corporate minutes should reflect the form of dividend being offered to stockholders. The worksheet asks you to declare all distributions and the form of distribution to update the records to achieve this end.
The Importance of Discussing Any Other Non-routine Corporate Matters With Us
Please also advise whether any additional corporate resolutions should be in the Corporate Minutes. Corporate resolutions set forth non-routine corporate actions, and shareholder and director ratification or approval.
Any non-routine or extraordinary actions taken by the Corporation should be included in the Corporate Minutes.
Upon completing the corporate worksheet and our receipt, we will review and supplement the corporate minute book so it will be current. The Corporation will be placed in our annual corporate minute book update program, and we will provide the Corporation with annual updates on or near the date specified in the bylaws each year, unless the Corporation directs us otherwise.
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