CORPORATE MINUTES: They May Seem Pointless, But They May Protect You
Most entrepreneurs come up with a great idea and start a business out of a garage. Before they know it they are up and running, slinging their unique product or service. Business gets better and soon they’re out of the garage. But along that journey they haven’t even considered whether they are correctly operating their business in a legal fashion, and the risks that could arise by not doing so.
When a business is operated outside of a specific entity type (such as a corporation or limited liability company), the owner is considered a sole proprietor. Customers and suppliers associate the business as an extension of the person. The IRS and other taxing authorities do the same: all the business income and expenses are reported directly on Schedule C of the individual’s income tax return.
By itself, that’s all fine and good. But…what if something were to go wrong? Really wrong, as in being sued. Then, those customers, suppliers, or a government agency come directly to the owner for satisfaction. Through legal action they may be able to access the individual’s personal assets, even not associated with the business venture. This is just one reason that wise business operators choose to create a separate entity (such as a corporation or limited liability company) to hold their business to give them personal liability protection.
You may have noticed that the subject of this article has not been mentioned yet. Well, we’re getting to that. Now that the business owner has taken the wise step of getting a separate legal entity to hold the business, it is important to demonstrate that the business and the person are separate and distinct. No one should ever be able to question whether the entity is being operated correctly from a legal formation standpoint. There should be no comingling of personal and business funds. In the absence of proper legal operation a court can allow a creditor to “pierce the corporate veil”, essentially throwing away the legal protection of the entity, and still allow access to the owners’ personal assets.
One very important way to demonstrate that a business is being operated correctly is by having annual minutes prepared. Annual minutes give a summary of the transactions that have occurred during the year and approve actions by the owners. Examples of items in the minutes include:
Selection of officers and directors
Owner compensation and other distributions or dividends
Loans to or from the business
Purchases and sales of equipment and machinery
Documentation regarding positions taken on income tax returns
Actions in regards to employee pension or retirement plans
Commencement and termination of leases
Information regarding certain material transactions
Sometimes an attorney will be the one to prepare the minutes, though there are services that can assist business owners in this function. Going through the effort of having them prepared demonstrates that the entity is being operated correctly and is not just merely an extension of the owner (like he’s still in the garage where he started).
While the effort and expense may seem like a waste of time and money, some states require the preparation of such minutes for corporations. With some simple planning it is relatively easy to have the minutes prepared, and they provide an excellent record of decisions made by the company. Our office has the ability to assist our clients in getting this very important step done each year. Give us a call and let us help.
Russ Wertz – Founder and CEO of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.