Corporations

Corporation Meeting Requirements

September 1, 2019 by John Sanchez

State corporation law and the corporation’s own bylaws set the rules by which a corporation holds valid meetings, takes valid corporate actions, and keeps corporate minutes. An organization’s legal standing as a corporation is risked if a corporation fails to hold corporate meetings documented by the corporation’s minutes.

Piercing the Corporate Veil
Corporations are often formed for purposes of protecting shareholders from liability. If formalities are not followed, the corporate veil can be easily “pierced” by a court, resulting in personal liability for the shareholders. Lack of adherence to corporate formalities (including holding an annual meeting evidenced by annual minutes) is a primary reason why courts may pierce the corporate veil.

Note: Generally, corporation law varies by state. The general concepts of how to properly call a meeting, give adequate notice, and correctly record corporate actions taken are often the same. However, the specific requirements may vary by state or the corporation’s own bylaws. Therefore, this information is to be used as a basic guideline only, and care should be taken to check compliance with state law and the corporation’s bylaws.

General Requirements for All Corporations
• Meetings need to be held at least annually.
• Give notice of date, time, place of meeting (or retain signed waiver of notice, see reverse) to all shareholders.
• Prepare minutes of the meeting, including the following.
– The name of the corporation.

The date, time, and place where the meeting was held.
– That notice of the meeting had been properly given or waived in accordance with the bylaws.
– Record of shareholders present and absent.
– That the minutes of the previous meeting were presented and approved.
– Any important changes to the business that happened during the year.
– Election of officers (by action of the board of directors) and directors (by vote of the shareholders) according to the corporation’s bylaws and articles of incorporation, if specified that elections should occur annually.
– Any other basic information covered and decisions made.

Single Shareholder
Requirements for meeting minutes are fairly simple for one shareholder corporations, but must still be kept in order to retain corporation status. Use the general requirements as a guideline and also consider the following information.
• Set a date of the meeting (this can be a past date since there is no need to give notice to oneself) to be held at least once annually.
• Record in the minutes, that the meeting is a joint meeting of the shareholders and the board of directors.
• Record in the minutes the election of directors and the election of officers (president, secretary, treasurer) for the next year (if indicated as necessary in the corporate bylaws).
• Sign the minutes as the secretary of the corporation and retain copies with other business documents.

Two Shareholders
If there are two shareholders, both are on the board of directors and one person is designated as the secretary of the corporation. Use the general requirements as a guideline and also consider the following information.

• Set a date of the annual meeting (if the shareholders meet often, it could be a past date with a signed waiver of notice, see next column) to be held at least once annually.

• Record in the minutes the two shareholders present and that it is a joint meeting of the shareholders and the board of directors.

• Record in the minutes the election of officers (president, secretary, treasurer) and directors for the next year (if indicated as necessary in the corporate bylaws).

• The secretary of the corporation signs the minutes and retains copies with other business documents.

Three or More Shareholders

When there are more than two shareholders, there is greater potential for disagreements. Steps should be taken to ensure that corporate formalities are adhered to so that one individual cannot later contend a meeting (and any decision made at that meeting) was not valid due to inadequate notice or non-attendance. Use the general requirements as a guideline and also consider the following information.

• The president, chair of the board, or secretary calls the meeting and gives adequate notice.

State corporation law and corporation bylaws establish how many days notice must be given for certain types of meetings.

• Set a date of the meeting and give adequate notice of the date, time, and place to all shareholders. Note: State corporation law may allow a valid meeting if all who are entitled to vote attend or if all who do not attend sign a waiver of notice, see next column.

• For a valid meeting, a quorum must be present. The articles of incorporation, bylaws, and state corporation law establish the quorum. Generally, it is a majority of the shares (or directors) entitled to vote.

• Record in the minutes any actions taken or resolutions passed and the vote in favor of each.

• Record in the minutes the election of officers (president, secretary, treasurer) and directors for the next year (if indicated as necessary in the corporation bylaws).

• The secretary of the corporation signs the minutes and retains copies with other business documents.

S Corporations

September 1, 2019 by John Sanchez

S corporations are corporations that elect to pass income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
To qualify for S corporation status, the corporation must meet the following requirements.
• It must be a domestic corporation.
• It must have only allowable shareholders.
– Allowable shareholders include individuals, certain trusts, and estates.
– Unallowable shareholders include partnerships, other corporations, and non-resident aliens.
• It must have no more than 100 shareholders.
• It must have only one class of stock.
• It may not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations.
In order to become an S corporation, the corporation must submit Form 2553, Election by a Small Business Corporation, signed by all the shareholders.

Corporate Formalities

Some or all of the benefits of establishing a corporation are lost when corporate formalities are not strictly followed. When a corporation is formed, a separate entity

is created, with legal rights and responsibilities that are distinct and separate from the shareholders.

Corporate Veil
Corporations are often formed for purposes of protecting shareholders from liability. However, if formalities are not followed, the corporation is not adequately capitalized, or personal and corporation funds are intermingled, the corporate veil can be easily “pierced” by a court, which results in personal liability for the shareholders.

Reasonable Wages
Since a corporation is a separate legal entity, shareholders performing services for the corporation are treated as employees and must be paid reasonable wages for the duties performed. Even with a single-shareholder corporation, federal and state payroll taxes must be withheld and a year-end W-2 must be submitted, just as with any other employee.

IRS Issues
If tax formalities are not followed, such as reasonable wages being paid to shareholders, the IRS can reclassify income and expenses, causing unwanted tax consequences.

S Corporation Forms

Annual Return of Income—Form 1120S, U.S. Income Tax Return for an S Corporation
A corporation or other entity must file Form 1120S if:
• It elected to be an S corporation by filing Form 2553,
• The IRS accepted the election, and
• The election remains in effect

Estimated Taxes
An S corporation may need to make estimated tax payments if it expects to owe taxes on certain built-in gains or passive income. Corporations must use electronic funds transfers to make all federal tax deposits, including installment payments of estimated tax.

Employment Taxes
• Social Security and Medicare taxes and income tax withholding—Form 941, Employer’s Quarterly Federal Tax Return. Generally, each quarter, all employers who pay wages subject to income tax withholding or Social Security and Medicare taxes must file Form 941 by the last day of the month that follows the end of the quarter.
• Federal unemployment tax (FUTA)—Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. Generally, the FUTA tax applies to the first $7,000 paid to each employee during a calendar year after subtracting any payments exempt from FUTA tax.
• Depositing employment taxes. Employers must deposit federal income tax withheld, plus both the employer and employee portion of Social Security and Medicare taxes, plus or minus any prior period adjustments to tax liability. All taxpayers must use the Electronic Federal Tax Payment System (EFTPS) to make federal tax deposits.
• State payroll tax requirements. The corporation should check with each state in which it conducts business or has employees to ensure the state requirements are met.

Individual Forms

Income Tax—Form 1040, U.S. Individual Income Tax Return, and Schedule E, Supplemental Income and Loss
Schedule E is used by the shareholder to report income or loss from the S corporation as provided to the shareholder on Schedule K-1. Losses from S corporations are limited to the shareholder’s basis. Other separately stated items from Schedule K-1 are reported on various forms and schedules of the shareholder’s Form 1040.
Unreimbursed business expenses paid by an S corporation shareholder are deductible as employee business expenses, subject to the 2% AGI limitation, only if the corporation has a resolution or policy requiring payment of the expense.

Estimated Tax—Form 1040ES, Estimated Tax for Individuals

Estimated tax is the method used to pay tax on income that is not subject to withholding, such as S corporation income.

Limited Liability Companies (LLCs)

August 30, 2019 by John Sanchez

What is a Limited Liability Company?
A limited liability company (LLC) is a business entity organized in the United States under state law. Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Depending on elections made and the number of owners, an LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner.
This information applies to LLCs in general, and different rules may apply to special situations, including banks, insurance companies, or nonprofit organizations that are LLCs. Check your state’s requirements.

Forming an LLC
Choose a business name. Your business name must be different from any existing LLC in your state, it must indicate that it is an LLC, and must not include words restricted by your state.

File the Articles of Organization. The articles of organization is a document that is filed with your Secretary of State that makes your LLC a legal entity and includes information such as your business name, address, names of members, and your resident agent. There is usually a filing fee.

Create an Operating Agreement. Most states do not require operating agreements, but they are highly recommended, especially for multi-member LLCs. The operating agreement structures your LLC’s finances and organization, and provides rules and regulations for its operation. Sometimes tax treatment can be dictated by a written operating agreement. Default tax rules of multimember LLCs will split income and expenses evenly, unless otherwise noted in an operating agreement.

Hold and document annual member meetings. If the operating agreement requires an annual meeting, these meetings must be held and documented. Failure to adhere to provisions in the operating agreement and other formalities could result in loss of liability protection for your LLC.

Apply for an EIN. An employer identification number (EIN) is a nine-digit number assigned by the IRS used to identify the tax accounts of employers and certain others who have no employees. If you will hire employees or have an LLC with multiple members, you need to apply for an EIN. See IRS Form SS-4, Application for Employer Identification Number, or apply online at www.irs.gov.

Classification of an LLC
Default classification rules. An LLC with at least two members is classified as a partnership for federal income tax purposes. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). See Single Member LLCs—Disregarded Entities, below.
Elected classification. If an LLC does not choose to be classified under the above default classifications, it can elect to be classified as an association taxable as a corporation or as an S corporation. After an LLC has determined its federal tax classification, it can later elect to change that classification. See IRS Form 8832, Entity Classification Election.

LLCs Classified as Partnerships
Ifan LLC has at least two members and is classified as a partnership, it generally is subject to the same filing and reporting requirements as partnerships. For certain purposes, members of an LLC are treated as limited partners in a limited partnership. For example, LLC members are treated as limited partners for purposes of material participation under the passive activity limitation rules.

Change in default classification. If the number of members in an LLC classified as a partnership is reduced to only one member, it becomes an entity disregarded as separate from its owner. However, if the LLC has made an election to be classified as a corporation and that elective classification is in effect at the time of the change in membership, the default classification as a disregarded entity will not apply. Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of.

Single Member LLCs—Disregarded Entities
If an LLC has only one member and is classified as an entity disregarded as separate from its owner, its income, deductions, gains, losses, and credits are reported on the owner’s income tax return. For example, if the owner of the LLC is an individual, the LLC’s income and expenses would be reported on the following schedules filed with the owner’s Form 1040.

• Schedule C, Profit or Loss from Business (Sole Proprietorship),
• Schedule E, Supplemental Income and Loss, or
• Schedule F, Profit or Loss From Farming.

Employment tax and certain excise taxes. If the LLC pays wages to employees, employment taxes must be reported and paid in the name and EIN of the LLC rather than in the name and EIN of the single member owner. The single-member LLC is also required to use the LLC’s name and EIN to register for certain excise taxes.

Self-employment tax. An individual owner of an LLC treated as a disregarded entity is not an employee of the LLC. The owner is subject to self employment tax on the net earnings in the same manner as a sole proprietorship.

Taxpayer identification number. For all income tax purposes, a single-member LLC classified as a disregarded entity must use the owner’s Social Security Number (SSN) or EIN. This includes all information returns and reporting related to income tax.

LLCs Classified as Corporations
An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules. An LLC classified as a corporation is subject to the same filing and reporting requirements as a corporation. The
entity may elect to be treated as an S corporation if it otherwise qualifies.

C corporation. If the entity is treated as a C corporation, it is taxed on its taxable income and distributions to members are includible in each member’s gross income to the extent of the corporation’s earnings and profits (double taxation).

S corporation. If the entity elects to be an S corporation, the corporation is generally not subject to an income tax. The income, deductions, gains, losses, and credits of the corporation pass through to the members.

Corporations

Corporation Meeting Requirements

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