Whatever kind of business you are in – manufacturing, retail, entertainment or anything else – operating as a corporation can provide you with important legal and tax advantages. But failing to do a simple task once a year can put at risk these benefits and, potentially, everything else you own.
One of the main reasons you formed a corporation or LLC (limited liability company) was to shield your personal assets from any liability your business may incur. That can be an enormously important safeguard.
Operating as a corporation also allows a business to deduct health insurance premiums paid on behalf of owner-employees and their families, contributions to tax-deferred retirement plans, life insurance as a benefit for employees (not owners), and other expenses.
Profits can be left in a C corporation to take advantage of its lower tax rate and to accumulate capital. An owner’s property can be leased to the corporation, and a range of other options are available that can be financially advantageous.
But all of these benefits require that the corporate structure be properly maintained. That includes the mundane but important step of keeping good corporate records, among which are the often-overlooked corporate minutes.
Corporations in California are required to have annual meetings of shareholders, when they elect their boards of directors. Typical events requiring approval by a board of directors would be the election of new officers, changes in compensation, issuing stock, buying or leasing property and other transactions during the year that affect the company.
Minutes serve as the official record of these shareholder and board of directors meetings. (LLCs don’t have annual meetings, unless required in the operating agreement.)
Minutes don’t need to be detailed or written in legalese. Simple language is fine, recording such basic facts as the date, time and location of the meeting, agenda items, votes taken, who was present and who was absent, and how each person voted.
In lieu of an actual meeting, actions can be approved by written consents of board members and shareholder – which become part of the corporation’s records.
Why are minutes so important? Certainly it’s helpful to have a good, succinct record of important decisions about your corporation. But the real issue is the possible impact of failing to keep minutes.
In a courtroom, or to the Internal Revenue Service, not keeping minutes can be interpreted to mean you have ignored your company’s corporate existence, so it could potentially also be disregarded by a judge or the IRS.
Should this happen, a very serious consequence could occur: what lawyers call “piercing the corporate veil.”
This means the courts could set aside the shield against liability that is usually afforded by a corporate structure, with the result that the company’s owners and directors would become personally liable for its actions and debts.
In a 1972 decision, the California Court of Appeal listed 23 factors a judge should consider when deciding whether to strip a company – and its owners – of the protection provided by doing business as a corporation. Number five on the list: “Failure to maintain minutes.”
Similarly, if the IRS determines that a company is not actually operating as a corporation, the agency could disallow some or all of the tax-advantaged measures the company had taken, subjecting the business and its owners to substantial potential taxes and penalties.
Conversely, consistently maintaining corporate minutes to document tax-related matters, such as salaries and bonuses, can be invaluable in defending against an IRS audit.
Keeping minutes isn’t complicated or time-consuming. If yours are not up to date, they can be reconstructed with care and the appropriate legal guidance. But simply failing to keep them can be legally and financially perilous.
By Michael R. Morris