Many small businesses are owned by individuals or families, but tend to operate as a corporate or pass-through entity, which is a separate legal entity from the individual or family. Incorporating as a corporation or limited liability company (“entity”) provides the “entity” with certain advantages, such as certain protections from liability, a perpetual business existence, and eligibility for special treatment under the tax codes. However, the “entity” can only enjoy these advantages if it maintains what are called “corporate formalities.” Corporate formalities are the basic rules and procedures for governing and operating a corporation (the Corporation’s bylaws describe many of these formalities). To keep its corporate status, the “entity” will want to follow and, most importantly, keep records of all of these formal corporate activities, which are commonly referred to as minutes. Without current and complete minutes the advantages of incorporation maybe lost. The preparation of current and complete minutes document and substantiate limited liability for “entity” debts, document and substantiate income and loss positions for Internal Revenue Service audits, and document authorization of contracts and obligations executed by the “entity”. 

The majority of small businesses regard these business formalities as an unnecessary administrative paperwork. Failure to adhere to these “corporate formalities” could result in unintended or disastrous results to the “entity” owners such as owner personal legal liability, or adverse income taxation and penalty calculations. Failure of an “entity” to hold meetings, adopt resolutions, maintain a minute record, comingling business and personal assets, or failing to properly sign documents are all events which could void the “entity” benefits and protections, also referred to as “piercing the corporate veil.”

The following is a list of items that should be included annually in the “entity” minutes:

  • Election of the Directors and Officers.

  • Statement of Accounting policies and procedures adopted or changed.

  • Declaration of dividends or distributions.

  • Authorization of Contracts.

  • Compensation of Officers and key employees.

  • Changes in bank accounts.

  • Changes in tax status.

  • Changes and contributions to employee benefit plans.

  • Capital transactions.

  • Loan transactions.

January 14, 2014 12:00 am