Compass Newsletter - Articles

Three Benefits of Corporate Minutes

by Barbara Jo Smith
Fall 1999

1. Counter IRS audit. The first item the IRS generally asks for in an audit is the corporate minute book. The IRS will look at whether the shareholders and directors have kept the corporation as a distinct entity from the shareholders personally. They will also scrutinize transactions between a shareholder and the corporation. The shareholders and directors should carefully document salary, loans, leases and sales between a shareholder and the corporation. In some cases, separate agreements are desirable. The shareholders and directors should approve the agreements in minutes.

2. Preserve Limited Liability. If the shareholders and directors do not follow corporate formalities, such as preparing annual meeting minutes, a corporate creditor has an argument to sue the shareholder as an individual. Creditors try to "pierce the corporate veil" of limited liability to collect against a shareholder's individual assets. Creditors can use lack of meetings and minutes as proof that the corporation is not a separate entity from the shareholder. Although a corporation provides some liability protection for the shareholder, it is not a substitute for good insurance coverage.

3. Enhance Sale Value. If a shareholder considers selling the corporation, a complete minute book enhances its value. A potential buyer may argue for price reductions if the minute book is incomplete because such records can expose the buyer to additional risk.

Years of minutes produced on the eve of an audit, lawsuit or sale are no substitute for minutes prepared each year while memories are fresh. Also, the shareholders and directors may have to answer the question of when the minutes were actually prepared.

If shareholders and directors take time to draft and sign corporate minutes, they should ensure that the minutes state the correct reasons for the corporate actions. Those reasons should support the tax treatment that the shareholders and directors seek and reinforce that the corporation is a separate entity from the shareholders. Do not create the proof that the IRS needs to increase taxes.

An alternative to meeting minutes is an action in lieu of meeting signed by all of the shareholders or directors. A small investment of time, money and effort to prepare good minutes or an action will pay off if an audit, lawsuit or sale occurs.