Corporate Law Articles

• How board meeting records benefit you
• Why you need corporate minutes
• Should your business be an “S” corporation?
• Back pay taxable at current rate
• Compete with caution against a past employer
• Recent legislation authorizes the formation of Series LLCs

How board meeting records benefit you

It is important that whenever the board of directors meet, a record of the discussions is included in the corporate minutes. Minutes can be valuable in the following situations: acceptance of contracts, approval for mergers, authorization of loans, project reports, election of officers, declaration of dividends, and compliance with governmental regulations. If a dispute arises later about any of these issues, the minutes can be used to help settle the controversy.

Why you need corporate minutes

Corporate minutes are records that could eventually save you and your company thousands of dollars. Corporate minutes can serve as the proof you need to back up your position if the IRS challenges an item on your return. Furthermore, they can help shield a business owner from personal liability for corporate debts. Corporate minutes are especially valuable in three areas: executive compensation, accumulation of earnings, and discussions at board meetings.

Because companies deduct compensation paid to corporate officers — salary, bonuses, etc., as a business expense — corporate minutes can justify the deductibility of compensation paid. However, if the IRS considers the compensation unreasonable (a disguised dividend) the deduction may be denied. To help avoid a denial describe the nature and complexity of each officer’s duties. Have the board of directors declare a dividend and specify the return on its capital investments. Set down the salaries of all officers and specify the procedures for salary adjustments and bonuses.

Should your business be an “S” corporation?

If you are a business owner who is seeking liability protection without an extra level of taxation, you may wish to explore the establishment of an “S” corporation. Generally, an “S” corporation does not pay income tax at the corporate level. The corporation’s income is taxed on the individual shareholder’s tax return. Regular corporations pay tax on corporation income. When the corporation distributes the income as dividends, the corporate shareholders are taxed on the dividends. Thus, there can be two levels of taxation in regular corporations.

“S” Corporations do have some disadvantages. If a shareholder owns more than 2 percent of the corporation’s stock, certain fringe benefits provided for the shareholder-employee may be taxed to him as additional wages. The corporation may have only one class of stock, is limited to 35 shareholders, and generally must use a calendar year for tax accounting purposes. Before you make a decision, you should consult your CPA and have your CPA consult with this office.

Back pay taxable at current rate

The Internal Revenue Service has a victory. The United States Supreme Court ruled in a unanimous decision that back pay awards are subject to federal taxes based on the year the money is paid out. The Internal Revenue Service argued that taxing the whole amount at one rate is much simpler than going back to figure out which old tax rates applied to what part of a lump-sum settlement.

The court’s decision affects Social Security and unemployment taxes on lump-sum labor settlements as well as other money that employers should have paid earlier but didn’t. Awards from employers for engaging in race, sex, and other discriminatory actions are also a major source of such back pay.

Compete with caution against a past employer

Noncompete or confidentiality provisions are used to discourage employees from stalling similar businesses. These statements are typically written into employment contracts. Few job candidates question them because they fear jeopardizing their employment prospects or because they don’t read the fine print. Yet, sometimes these agreements are negotiable.

When former employees start a competitive business, the employer may claim it will usurp customer relationships or misappropriate confidential information. This results in a lawsuit against the owners of the new company. Some companies will file costly suits to enforce these contracts, to wear down their new rivals or to scare off other managers from following in their footsteps. Large corporations know how to play a lethal game of hardball and use their deep pockets to do so.

Many entrepreneurs don’t always think through the legal implications. Managers of large corporations thinking of striking out on their own should proceed with extreme vigilance. When the economy is tight, companies are more protective.

Recent legislation authorizes the formation of Series LLCs

New enacted legislation authorizing the formation of Series LLC limits the liability of corporations. To understand how Series LLC work, compare them to small boxes that fit within one larger box. Each of these small boxes is a series, and the liabilities of any particular series are enforceable only against the assets of that series. In addition, there is only one big box resulting in administrative expense savings versus forming separate administrative structures for each of the small boxes.

Some of the main features of a Series LLC are:

• Each series can be tied to specific assets with different members and managers.
• Each series can have its own business purpose permitting distributions independent of the other series.

One of the most obvious reasons for a Series LLC is for the holding of multiple parcels of small commercial or residential properties. Holding each parcel in a series insulates it from liabilities from other parcels. Retail outlets may also benefit from a Series LLC. In addition, only a single state registration is required as a legal entity for tax filing purposes, and each series doesn’t need to file its own separate tax return.