If you own a corporation (whether it is a C or S corporation), it is important to keep good records on actions taken by shareholders and/or your board of directors at their meetings. The reason: If your corporation fails to act like a corporation, creditors can “pierce the corporate veil” and hold you personally liable. Retain these records in the corporate minutes book.
The following is a listing of key votes that should be taken for tax actions. Some apply only to C corporations, while others apply to both C and S corporations.
Adopting a fiscal year.
Adopting an accounting procedure for the de minimis safe harbor rule (see Chapter 14).
Adopting any of the following employee benefit plans:
Accountable plan.
Adoption assistance plan.
Deferred compensation plan.
Cafeteria plan.
Educational assistance plan.
Employee stock ownership plan (ESOP).
Group legal services plan.
Medical reimbursement plan.
Qualified retirement plan.
Stock option plan.
Authorizing a sale/leaseback transaction.
Authorizing compensation and bonuses to employees (including shareholder-employees) and payments to corporate directors. To justify larger compensation to C corporation shareholder-employees, note in the minutes why the payment is reasonable under the circumstances (e.g., the payment reflects a catch-up for years in which little or no compensation was paid). Also, if desired, include a resolution requiring officers to repay excess compensation (amounts determined to be nondeductible because they are unreasonable).
Authorizing a reimbursement arrangement for officers’ expenses.
Declaring dividends.
Making or terminating an S corporation election.
Retaining earnings. C corporations that want to amass funds for future projects rather than distribute earnings currently to shareholders should use corporate minutes to reflect the reason for accumulating earnings to avoid a penalty on excess accumulations. These are earnings over a set limit ($250,000, or $150,000 for personal service corporations). However, to the extent earnings are retained for specific reasons spelled out clearly in corporate minutes, the penalty can be avoided if the accumulations are reasonable. For example, if funds are being accumulated to purchase property, to build a factory, or to buy out the interest of an owner who dies or is about to retire, the penalty will not be imposed as long as there is a record of this purpose and the amount of the set-aside is appropriate to the reason.
Authorizing the purchase of the assets of another company.
Transactions between the corporation and shareholder (e.g., a lease of property by the shareholder to the corporation; an interest-free loan from the corporation to the shareholder).
Other corporate resolutions that you might consider include:
Acquiring assets or shares of stock in another business.
Adopting a trade name.
Assigning a lease, terminating a lease, or subletting space.
Authorizing banking activities, including setting up a bank account, obtaining a corporate credit card, and establishing a line of credit.
Borrowing money from outside parties, including individuals related to owners.
Commencing litigation.
Factoring accounts receivable.
Filing for bankruptcy protection and approving a reorganization plan under Chapter 11 of the Bankruptcy Code.
Issuing a guarantee or indemnification.
Leasing equipment (including vehicles).
Purchasing large equipment and realty.
Retaining an outside professional (accountant, attorney, business broker, consultant).
Selling corporate assets or shares.
Terminating contracts, leases, and certain employees.