Corporate Annual Meetings Are Important



Generally, one of the requirements for maintaining a corporation's existence (and the liability protection that it affords) is that the shareholders and Board of Directors must meet at least annually. Although most people view this requirement as a necessary evil, it doesn't have to be a waste of time. For example, in addition to being a first step in making sure the corporation is respected as a separate legal entity, an annual meeting can be used as an important tool to support your company's tax positions.

Besides the election of officers and directors, other actions that should be considered at the annual meeting include the directors approving the accrual of any bonuses and retirement plan contributions, and ratifying key actions taken by corporate officers during the year. It is common for the IRS to attack the compensation level of closely held C corporation shareholder/officers as unreasonably high and, thereby, avoiding taxation at the corporate level. A well-drafted set of minutes outlining the officers' responsibilities, skills, and experience levels can significantly reduce the risk of an IRS challenge. If the shareholder/employees are underpaid in the start-up years because of a lack of funds, it is also important to document this situation in the minutes for future reference when higher payments are made.

The directors should also specifically approve all loans to shareholders. Any time a corporation loans funds to a shareholder, there is a risk that the IRS will attempt to characterize all or part of the distribution as a taxable dividend. The primary documentation that a distribution is intended to be a loan rather than a dividend should be in the written loan documents, and both parties should follow through in observing the terms of the loan. However, it is also helpful if the corporate minutes document the need for the borrowing (how the funds will be used), the corporate officers' authorization of the loan, and a summary of the loan terms (interest rate, repayment schedule, loan rollover provisions, etc.).

A frequently contested issue regarding a shareholder/employee's use of employer-provided automobiles is the treatment of that use as compensation (which is deductible by the corporation) vs. treatment as constructive dividends (which is not deductible by the corporation). Clearly documenting in the corporate minutes that the personal use of the company-owned automobile is intended to be part of the owner's compensation may go a long way in ensuring the corporation will get to keep the deduction.

If the corporation is accumulating a significant amount of earnings, the minutes of the meeting should generally spell out the reasons for the accumulation to help prevent an IRS attempt to assess the accumulated earnings tax. Also, transactions intended to be taxable sales between the corporation and its shareholders are sometimes recharacterized by the IRS and the courts as tax-free contributions to capital. Corporate minutes detailing the transaction are helpful in supporting a bona fide sale.

As you can see, many of the issues raised by the IRS involve the payment of dividends by the corporation. (The IRS likes them - the corporation doesn't.) To help support the corporation's stance that payments to shareholders are deductible and that earnings held in the corporation are reasonable, corporate minutes should document that dividend payments were considered and how the amount paid, if any, was determined. Dividends (even if minimal) should generally be paid each year, unless there's a specific reason not to pay them - in which case, these reasons should be clearly documented.

These are just a few examples of why well-documented annual meetings can be an important part of a corporation's tax records. As the time for your annual meeting draws near, please call us if you have questions or concerns

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