Corporate Considerations

A corporation holds legal status separate and distinct from its shareholders. Individuals considering incorporating a business must be familiar with and willing to adhere to corporate formalities.

• The corporate checkbook is owned by the corporation, not by the shareholder. A personal expense paid with a corporate check is treated as a distribution to the shareholder. Such a distribution is taxed as a dividend in the case of a C corporation. In an S corporation, the distribution reduces the shareholder’s basis in stock.
• Each time a shareholder makes a contribution to capital, the corporation must issue a stock certificate signed by the officers. The shareholder should keep a detailed record of all capital contributions, since a taxpayer who is unable to prove cost/basis is deemed to have a basis of zero.
• A double-entry bookkeeping system must be set up and maintained since a balance sheet is generally required for the corporate tax return. The shareholders should consult with or hire and accountant to make sure the corporation has adequate books and records.
• When shareholders perform services for a corporation, they are generally treated as employees. The corporation must file state and federal payroll tax returns, and must issue a W-2 to each employee.
• A corporation must hold shareholder meetings and keep corporate minutes to record what was discussed. Minutes must be updated at least once per year. State law determines specific procedures to be followed at corporate meetings. Shareholders should consult with an attorney to make certain that improper actions by the corporation can automatically terminate S status.

Subjects to be addressed in the corporate minutes:
- Acceptance of prior meeting’s minutes.
- Election of officers.
- Ratification of significant officer actions for the prior year.
- Listing of officer salaries for next year, and reasonableness of the compensation when the officer is also a shareholder.
- Detailed presentation of the need to accumulate earnings for specific future business needs.
- Approval of loans to shareholders.
- Approval of loans from shareholders.
- Annual valuation by the board of directors of the business for possible future buy/sell agreements.
- Approval and accrual of officers’ bonuses.
- Determination of retirement plan contributions.
- Establishment of fringe benefit plans.
- Approval for stock issuance, stock redemption and stock bonuses.
- Approval for sale, liquidation or reorganization.
- Discussion of any Section 351 asset transfers.
- Discussion on election or termination of S corporation status.
- Declaration of dividends to shareholders.

If you would like more information on the above topics, please contact us at 859-986-3756. We are located at 206 ½ Richmond Road in Berea.

You may reach Sammy at SammyLee@skleecpa.com