The Importance of Corporate Minutes and Shareholder Loan Documentation

Dear Clients and Friends:

There are many benefits of operating a business as a corporation.  To fully realize these benefits a corporation should strive to have the appearance of a true and legitimate operating corporation separate and distinct from its shareholders.  There are two issues we would like to bring to your attention which, if not done properly, may bring into question the validity of the corporation and could cause undesirable consequences.  The two issues are 1) corporate minutes and 2) shareholder loans.

In order to maintain the appearance of a corporation, both small and large, there is the requirement to maintain corporate minutes. To ensure that a corporation is respected as a separate legal entity, a corporation’s officers/directors and shareholders must meet at least annually and corporate minutes must be maintained for those meetings, even if all of the above are only one person. Corporate minutes should at a minimum include information about when and where the meeting was held, who attended and the officers/directors that were elected. Please consult your attorney for further assistance relating to these matters.

From a tax perspective, there are some additional points that should be noted in the corporate minutes to ensure the corporation is respected as a separate entity for tax purposes and to reduce the chances that certain tax deductions are disallowed under audit from the IRS or other state agencies.  These include, but are not limited to:  approval of bonus accruals, approval of retirement plan contributions, approval of any shareholder loans and justification for officer compensation.

The other issue that, based on our experience, may be scrutinized under audit is shareholder loans. Any time a corporation loans funds to a shareholder, there is a risk that an auditor may attempt to characterize all or part of the loan as a taxable dividend to the shareholder. To avoid this disastrous result, all reasonable precautions should be taken to ensure that the loan between the corporation and the shareholder will meet the auditor’s definition of a loan. Listed below are a few steps that can be taken to ensure that shareholder loans will not be re-characterized as dividends or other distributions:

• There should be a written loan document evidencing the loan. This document should state the amount to be repaid, when it needs to be repaid and the interest rate at which the loan will be subject.
• The loan must bear a reasonable interest rate (at least the federal AFR).
• The loan should be documented in the corporate minutes.
• The loan should not have an unreasonably long maturity date.
• Evidence should be kept to show that the loan is being repaid according to the schedule established in the written loan document.

There are other important aspects to consider regarding maintaining corporate minutes and shareholder loan documentation.  Please contact our office if you have any questions and/or want to discuss this information in greater detail.

Very Truly Yours,

Wright Ford Young & Co.,

Certified Public Accountants and Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.