End of year tax planning is happening. Are there any year-end legal documents you need for my corporation or LLC? Yes, and most entrepreneurs and business owners overlook these. Don’t wait 112 years to ‘renovate.’
As an owner and entrepreneur you probably operate your business through an S corporation or limited liability company (LLC). Hopefully you relied on professional advice in choosing and establishing the business to ensure it best suits your needs. LLCs are over hyped and generally an S corp is better suited and provides all the protections touted for LLCs with easier maintenance and operations. Next weeks’ post will delve into that and risk of self-employment tax for LLC owners.
The two primary factors for entity choice are personal asset or liability protection and tax benefits. Regardless of whether you relied on a professional or risked DIY, it is important to understand that after you establish your entity, you are not done! There are ongoing record keeping requirements that can cause the loss of liability protection and tax benefits! You must keep take these steps initially, annually, and sometimes more frequently to maintain the protections provided by a corporation or LLC. These apply no matter where you established your business.
The greatest risk most owners and entrepreneurs face is known as ‘piercing the corporate veil.’ Regardless of what entity you use, corporation or LLC, or if you are the only shareholder or member, failing to maintain the corporate formalities creates substantial risk. The ‘corporate veil’ is the legal concept that the entity is separate from the owner(s). This is why someone suing the business can only collect against the business assets and not your personal assets. It also enables the preferential tax treatment of an S corporation or LLC. When a business fails to maintain the required corporate records, a plaintiff can seek to ‘pierce the corporate veil’ and go after your personal assets. Failure to maintain corporate records can also allow the IRS to ignore the business and treat you as a sole proprietor, removing certain deductions and creating liability for failure to pay self-employment and other taxes and eliminated possible deductions.
So, how do you avoid this and protect your assets and hard work? It is relatively simple to set up a system to ensure you have taken all steps necessary. This is also why it is advisable to have an attorney establish the entity for you, as they will ensure the required documents are properly prepared.
After establishing the entity, your corporate records should include Bylaws and Organizational Minutes tailored to your needs, and a shareholders agreement if more than one owner. If you own an LLC, at a minimum you must have an Operating Agreement.
Here is the critical point most business owners miss! Even if you have the organizational documents every year, like filing taxes, there are corporate maintenance steps you must take. Obviously, filing the annual report and paying the annual fee to the state where you are established and where registered to do business is required. The step most owners forget is strictly internal – an annual shareholders or member meeting. You should record minutes from the meeting that evidence any resolutions and affirming actions taken in the year. Also, if you have not had monthly or quarterly Board of Director’s meetings, you should have an annual meeting, with recorded minutes kept in the corporate records. How do you know when you are supposed to have those meetings? That should be outlined in the Bylaws.
You are might be thinking, ‘I’m the sole shareholder’ or “I own a single member LLC’, do I really have to have a meeting? Yes! Even if you are the sole owner, you must maintain the formalities. Obviously, you don’t need to send yourself the required notices of board of director and shareholder’s annual meeting, but you should retain Board of Directors meeting minutes and at least a Written Resolution each year by shareholders and Directors in your corporate records.
What goes in the Board of Director and Shareholder or Member meeting minutes?
This is where having tailored bylaws is important. You must ensure that you have the required quorums and majorities for votes. If sole owner, then this is not applicable. You should note consideration and approval of any major events such as large business purchases, major contracts and leases, hiring or terminating key employees, adding new owners or investors, loan agreements, etc. Most lenders will require resolutions, but even if don’t, these should be noted in the corporate records. For Board of Directors meetings, these should be done as scheduled in the Bylaws, and at least annually. Shareholder/Member meetings are normally held annually.
This is what proves the business is a business and not just an ‘alter ego’ to the individual – even if you are the sole owner.
Holy Cannoli Bob, I haven’t done this for the last 5 years! What do I do now!
Fortunately, it’s not beyond repair. You should consult with an attorney that can help you prepare appropriate minutes and resolutions affirming the past actions of the owners and officers and bring your business back into compliance to provide its full liability protection and tax benefits.
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Until then, Keep it Legit!
Bob