January 2017
Dear Shareholder or LLC Member,
We thought you might appreciate the following list of items that you, as a shareholder of a corporation, should consider annually.
At minimum, have an annual formal shareholder and board of directors meeting with appropriate documentation. The purposes of board meetings are to create a record concerning matters that might cause problems later. When your minutes are properly written, they can decrease your tax liability and protect you from personal liability. The following are a few key areas that, if applicable, should be well documented in your minutes:
- Executive compensation - Use your minutes to document a board decision to compensate executive employees for either excessive or reduced salaries. The Internal Revenue Service is looking for shareholders who disguise dividends as salary for a “C” corporation or shareholders who disguise salary as distributions for an “S” corporation. To combat the IRS arguments, your minutes should show that the board has formally approved and ratified the executives’ salaries and should give a basis for each salary (e.g., training, education, duties, etc.)
- Accumulated earnings - The IRS wants “C” corporations to distribute their profit by paying dividends to shareholders, so it can tax those profits twice: first at the corporate level and then at the shareholder’s individual level. The tax code lets your corporation accumulate $250,000 (personal service corporations are limited to $150,000) of earnings without questions. We call these monies retained earnings. Nevertheless, if your corporation holds more, that amount faces the “accumulated earnings tax,” unless you show “reasonable business purposes” for keeping the profits. Such reasons may include: business expansion, diversification and plant replacement, self-insurance for product liability suites, stock redemptions, working capital, contingencies and debit retirement. Your corporate minutes will help to prove to the IRS and Tax Court your intentions for aggregating those profits.
- Loans - Loans from a corporation to a shareholder must be legitimate. If they appear not to be, the IRS will reclassify them as dividends and tax them accordingly. Several factors are considered to decide whether a shareholder distribution is a loan or legitimate business purpose for making the loan and whether your board of directors authorized it.
- Retirement Plans - For pension contributions to be deductible by your corporation and the tax deferred to your employees, the plan must meet IRS criteria. Among the requirements you must intend the plan to be permanent and provide benefits for employees in a nondiscriminatory way. Your corporate minutes can prove intentions.
- Car, travel, and entertainment expenses - If an audit occurs, the IRS may question if the reimbursement for these types of expenses is really additional compensation. Your minutes can help convince the IRS that these are actual business expenses.
Shareholder/LLC Member
January 2017
Page 2
- Rent - You or your family members may lease space to your corporation. In such cases, this may be challenged by the IRS that this is a disguised dividend. Having minutes that detail reasons for the arrangement and evidence that the company is paying a fair rental value is advisable.
To summarize: document all-important actions and decisions in the permanent records of the business by resolution of the board of directors.
Other items we suggest you consider:
1. Meet with your legal counsel as part of or after the meetings to see any legal issues arise.
2. Meet with the company’s insurance agent to review all business insurance policies.
3. Update all buy-sell agreements by business valuation and ensure adequate insurance funding of the agreements.
4. Meet with the company’s primary banker to discuss the financing needs for the next year and to ensure that the company meets restrictive loan covenants, if any.
5. Meet with the company’s back up bank to discuss the financing needs for the next year.
6. Meet with the company’s certified financial planner to see if the valuation of your business has an effect upon your estate plan and what, of any, changes are required, and to ensure that the company funds are properly invested for better yields than those currently available to the banks.
7. Consult with the company’s waste disposal company and/or environmental engineer and/or an attorney to endure compliance with the ever-increasing environmental regulations.
8. If you are considering the purchase of any business or land or building, consult with the company’s environmental engineer and/or attorney to ensure that they have performed all environmental studies before the purchase.
9. Develop or update an annual business plan, marketing plan, and budget.
10. Review your record retention policies.
11. Review your computer needs, both hardware and software.
12. Review your personnel policies and update your employees’ policies and documentation of those policies.
13. Meeting with Main Street Tax & Accounting Services for tax planning and other business strategy and tactical planning.
We realize this is a long list, and certainly not all-inclusive. We hope you find this list of items useful as you prepare for the upcoming year.
As always, we appreciate the opportunity to be of service to you.
If you have any questions on the above, please feel free to contact our office at your convenience.
Thank you!
Sincerely,
Denise
Denise E. Brandt, EA.
President