Maintaining those oft-neglected corporate minutes can mean the difference between survival and failure for a business facing an IRS audit, court action, or bankruptcy.
An ounce of prevention in this important area is worth a pound of audits. Suppose the minutes for your company’s board or directors’ meeting held two years ago have just been subpoenaed for use in a lawsuit. Or suppose a 2-year-old action is now challenged by the IRS. It will be too late then to get the minutes and board resolutions in order.
But what about the minutes and resolutions for your next meeting? Will they withstand scrutiny in the future?
Businesses must keep good corporate minutes and records for these reasons:
Protect Your Corporate Shield
The overwhelming reason businesses incorporate is to help protect the owners’ personal assets – home, car, family savings, etc. – from business debt. That is because a corporation is a separate legal entity compared to an individual. But the failure to keep proper corporate minutes can result in the piercing of the “corporate veil” (the protection for officers and shareholders). This means each of the officers or shareholders can be named in a lawsuit (“alter ego liability”) and could be found personally liable for all debts of the business, as if the corporation never existed.
Obey the Law
The U.S. Corporations Code, section 1500, states that each corporation shall keep adequate and correct books and records of account. This covers all minutes of the proceedings of its shareholders, board and committees of the board. By law, senior management and the board of directors are accountable for assuring sound management of these administrative matters. Violations of this section can result in harsh liabilities and penalties imposed by the Department of Corporations.
Avoids Double Taxation
If an owner charges personal expenses – such as travel and lodging – to the company, then faces a challenge from the IRS, accurate corporate records will help. Sometimes the tax agency will try to forbid reimbursement to the owner for these expenses, considering them as “dividends. ” Without explicit expense records, it winds up being double taxation for the owner. Dividends aren’t deductible and are taxable income for the owner.
Avoids Higher Tax Rates
Without the right corporate records, the IRS will consider the owner to be operating as an individual and not as a corporation. As a result, the IRS can shatter the corporate veil and impose an individual tax rate that will likely be much higher than the corporate one.
Companies should conduct routine check-ups of their business records at least annually. Maintaining corporate records can be done at the price of a paralegal instead of an attorney, with oversight from the attorney.
For all of your corporate minutes needs, please contact the Law Offices of Mitchell S. Ostwald by emailing us here.
