Naturally, it takes some time to create “corporate minutes” in a business setting. But it is usually time well spent. Plus, it is easier than it was years ago to have minutes prepared, due to improvements in computer software.
Significantly, corporate minutes can serve as the proof you need to back up your position if the IRS challenges an item on your return. Furthermore, they can help shield a business owner from personal liability for corporate debts. In particular, corporate minutes can be especially valuable in three key areas:
1. Executive compensation: Your company can deduct compensation paid to corporate officers—salary, bonuses and so on—as a business expense. However, the compensation must be “reasonable in amount” for the services rendered. If the IRS considers the compensation unreasonable (e.g., a disguised dividend), the deduction may be denied. There are a few steps you can take via the corporate minutes to justify the deductibility of compensation paid.
- Set down the salaries of all officers and specify the procedures for salary adjustments and bonuses.
- Have the board of directors declare a dividend and specify the return on its capital investments.
- Spell out the details of any unusual circumstances (e.g., an officer who takes on additional responsibilities in an understaffed office).
- Describe the nature and complexity of each officer’s duties.
2. Accumulation of earnings: If a company retains earnings beyond the reasonable needs of the business, it may have to pay a penalty tax. The tax is not imposed unless the accumulated earnings exceed $250,000 (the limit is $150,000 for personal service corporations).
How much is the tax? For 2013, it is a flat 39.6% on accumulated taxable income. However, corporate minutes may be able to protect your company from this penalty. For example:
- The minutes can show detailed expansion plans that justify retention of earnings.
- The minutes can point out extenuating business circumstances (e.g., a cyclical sales flow or the threat of a strike).
- The minutes can reflect the intent to retain earnings only to cover working capital for the year, based on a precise formula.
3. Records of board meetings: Whenever the board of directors meets, a record of the discussions should be included in the corporate minutes. Reason: If a dispute arises later on, the minutes can be used to settle the controversy. For instance, minutes can be valuable in the following situations: election of officers, declaration of dividends, acceptance of contracts, approval for mergers, authorization of loans, project reports and compliance with governmental regulations.
Of course, there is no guarantee that a dispute will be settled in your favor, but the minutes are probably the best proof you can have.
In summary: It is important that your minutes are accurate and precise. But that’s not enough. You also must make sure that they are updated to reflect any changes.
For more information on our Executive Compensation Services, contact Ted Ginsburg by leaving a comment below or by calling 440-449-6800.