5 Essentials for Your Corporate Minutes
Corporations, both C and S, are required by state law to maintain corporate minutes. State law may also require that annual meetings and other corporate actions be recorded in official minutes of the business.
Unfortunately, owners of closely-held corporations may take a casual approach to the operations and overlook the need to formalize corporate actions in the corporate minutes. The failure to keep accurate and complete minutes can lead to legal and tax problems or missed opportunities. Besides dividends authorization, use corporate minutes in the following situations.
S election
A C corporation can elect to be taxed as a small business corporations in which profits are taxed directly to shareholders, eliminating tax at the corporate level. To make such as election, shareholders, acting in concert, must file an election with the IRS (and with the state in which it operates if applicable).
In the corporate minutes, note the shareholders’ desire to make an S election. Attach to the minutes a copy of the forms filed with the IRS and state.
Restrictions on stock transfers
Closely-held corporations may want to limit the transfer of shares in order to control ownership.
For example, shares may be subject to a buy-sell agreement requiring an exiting owner to sell to remaining shareholders or the corporation to redeem the shares.
In the corporate minutes, note any restrictions on the transfer of shares. Also include such restrictions on the shares themselves.
Accountable plans
Through an accountable plan, corporations can handle reimbursements for employees’ travel, entertainment and other company expenses in such a way as to minimize payroll taxes and help employees save on their income taxes.
Such a plan requires employees to substantiate expenses to the company and return excess advances or reimbursements within a reasonable time.
In the corporate minutes, note the adoption of an accountable plan. This does not require a lengthy written statement (as in the case of a qualified retirement plan). Rather, it is an acknowledgment in the minutes of the plan’s existence and implementation of the requirements of the plan (e.g., employees’ substantiation and returning excess funds).
Medical reimbursement plans
C corporations may wish to supplement health insurance with a medical reimbursement plan. Such a plan pays up to a fixed dollar amount of an employee’s out-of-pocket expenses (e.g., $2,500 or $5,000 annually).
In the corporate minutes, note the adoption of a medical reimbursement plan. Separately draw up a written plan detailing specific terms, such as the conditions for reimbursement, the types of expenses to be reimbursed and who is covered under the plan.
Retained earnings
C corporations may wish to retain earnings rather than distributing them to shareholders. Currently, dividends to shareholders are taxed at no more than 15%, but in 2009, this low rate is set to expire, reverting to a 35% tax rate on dividends (unless Congress extends the law). Shareholders may want their corporations to hold onto earnings so that these can eventually be distributed as capital gains (e.g., when the corporation is sold or a shareholder’s stock is redeemed).
The tax law generally limits accumulated earnings to $250,000 (or $150,000 in the case of personal service corporations). Additional earnings can be accumulated only to meet the reasonable needs of the business. Any accumulated earnings over this amount are subject to a 15% tax penalty (scheduled to be 35% in 2009).
In the corporate minutes, detail the reasons why your corporation is retaining earnings rather than paying out dividends. Examples: Funds may be needed for the replacement of plant or equipment, retirement of corporate debt, the stock redemptions of deceased or retiring shareholders, or payment of damages in a pending legal action.
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