Corporate minutes reflect decisions made or actions taken by the corporation's shareholders and/or its board of directors during a meeting. Recordkeeping can be a boring and troublesome chore that no one wants to do. But keeping good minutes is vital to shareholders who want to maintain their personal liability protection. If the corporation fails to act like a corporation, creditors can "pierce the corporate veil" and hold shareholders personally liable. One of the key ways in which to avoid this is to keep good minutes of decision-making at the corporate level.
When to use minutes
Corporate minutes should be used to record every corporate decision. Some decisions, called corporate resolutions, require that both shareholders and the board vote on them. Others can be passed by either the shareholders or the board. In either case, the outcome of the vote is noted in corporate minutes.
The rules governing corporate resolutions are fixed by state law. If these rules are not followed, the intended results from the resolutions are not valid. Dual action by shareholders and the board is generally required to make dramatic changes to the corporation. For example, dual action is necessary to amend the corporation's articles of incorporation and to dissolve the corporation.
Actions governing daily activities of the corporation usually are handled by the board of directors. These include:
- Electing corporate officers and directors
- Setting salaries and bonuses
- Declaring dividends
- Electing S corporation status
- Approving transactions between the corporation and its shareholders, such as loans to shareholders or leasing property to/from them
- Adopting employee benefit plans, such as a qualified retirement plan, an adoption assistance plan, an education assistance program or a medical reimbursement plan. Annual contributions to the retirement plan should also be approved by the board and recorded in the minutes.
Retained earnings. C corporations that want to amass funds for future projects rather than distribute earnings currently to shareholders should use corporate minutes to reflect the reason for accumulating earnings. Why? The tax law imposes a penalty on excess accumulations, which are earnings over a set limit ($250,000, or $150,000 for personal service corporations). However, to the extent earnings are retained for specific reasons spelled out clearly in corporate minutes, the penalty can be avoided if the accumulations are reasonable. For example, if funds are being accumulated to purchase property or to buy out the interest of an owner who is about to retire, the penalty will not be imposed as long as there is a record of this purpose and the amount of the set-aside is appropriate to the reason.
Other rules on minutes
When should corporate minutes be recorded? Usually they are put in writing contemporaneous with corporate meetings. Keep notes at the meeting and write them up more formally as soon as possible after the meeting. There is commercial software, such as MyCorporation.com(www.mycorporation.com/corpres.htm) and Corporate Manager Software (www.corporateforms.net), which can be used to help draft corporate resolutions and keep corporate minutes.
Since corporate boards should meet at least annually, minutes should be updated at least once a year. However, if additional actions are taken during the year, minutes should be made at that time.
How long these records must be retained? It is usually a good idea to keep corporate minutes indefinitely so they are available for inspection by shareholders, government officials and others entitled to such access. For example, if the corporation adopts an "accountable plan" under which it will reimburse employee expenses in such a way that no income results to the employees, the adoption of this plan should be included in the minutes and made available to the IRS if necessary. At a minimum, retain corporate minutes for at least six years. And, as with all critical documents, keep the minutes in a safe location, such as a safe deposit box. If they are stored on a computer, be sure to have adequate back-up protection.
Final word. It may be helpful to work with professionals, such as your attorney, to ensure that corporate minutes are complete and accurate and comply with state law requirements and IRS rules.