If you are incorporated (whether a C or S corporation), you are required by state law to hold an annual meeting. While there’s no government penalty for not doing this, it can cost you personal liability protection; if the corporation is sued, a creditor can “pierce the corporate veil” on the grounds you haven’t respected the corporate entity, providing them with an opening to collect against your personal assets. Beyond this, however, it is a good business practice to hold an annual meeting so you can review your current situation and adopt measures for the coming year. The following information will help you understand why you should have a meeting before the end of the year, how to do it, and what to cover. (This content is adapted from my book J.K. Lasser’s Small Business Taxes 2015.)
Why and how to hold an annual meeting
In order for a corporation to take certain action, it must be approved by the board of directors. The board members may be the same people who currently act as officers. For example, if you are the sole shareholder, you may be the president (and/or CEO) of the business as well as a board member. Check state law to determine how many board members are required and who can serve.
The meeting need not be a formal affair. If you are the sole shareholder, you can do the meeting on paper. The key is to keep good records of the meeting. There are templates you can use to record notice of the meeting (or waiver of notice), as well as actions taken. Be sure to retain these records in your official minutes book.
What to cover in the meeting
The following is a listing of key votes that should be taken for tax actions. Some apply only to C corporations, while others apply to both C and S corporations.
- Adopting a fiscal year.
- Adopting any of the following employee benefit plans:
- Accountable plan.
- Adoption assistance plan.
- Deferred compensation plan.
- Cafeteria plan.
- Educational assistance plan.
- Employee stock ownership plan (ESOP)
- Medical reimbursement plan.
- Qualified retirement plan.
- Stock option plan.
- Authorizing a sale/leaseback transaction.
- Authorizing compensation and bonuses to employees (including shareholder-employees) and payments to corporate directors. To justify larger compensation to C corporation shareholder-employees, note in the minutes why the payment is reasonable under the circumstances (e.g., the payment reflects a catch-up for years in which little or no compensation was paid). Also, if desired, include a resolution requiring officers to repay excess compensation (amounts determined to be nondeductible because they are unreasonable).
- Authorizing a reimbursement arrangement for officers’ expenses.
- Declaring dividends.
- Making or terminating an S corporation election.
- Retaining 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 to avoid a penalty on excess accumulations. Such penalties can be imposed for total retained earnings over $150,000 for personal service corporations; $250,000 for all others. 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, to build a factory, or to buy out the interest of an owner who dies or is about to retire, the penalty will not be imposed as long as there is a record of this reason and the amount of the set-aside for the specific purpose.
- Authorizing the purchase of the assets of another company.
- Transactions between the corporation and shareholder (e.g., a lease of property by the shareholder to the corporation; an interest-free loan from the corporation to the shareholder).
Other corporate resolutions that you might consider include:
- Acquiring assets or shares of stock in another business.
- Adopting a trade name.
- Assigning a lease, terminating a lease, or subletting space.
- Authorizing banking activities, including setting up a bank account, obtaining a corporate credit card, and establishing a line of credit.
- Borrowing money from outside parties, including individuals related to owners.
- Commencing litigation.
- Factoring accounts receivable.
- Filing for bankruptcy protection and approving a reorganization plan under Chapter 11 of the Bankruptcy Code.
- Issuing a guarantee or indemnification.
- Leasing equipment (including vehicles).
- Purchasing large equipment and realty.
- Retaining an outside professional (accountant, attorney, business broker, consultant).
- Selling corporate assets or shares.
- Terminating contracts, leases, and certain employees
Noncorporate entities
If you have a partnership or limited liability company (LLC), there is no statutory requirement that you hold an annual meeting. However, you may be required to do so under the terms of your operating agreement. Even if you don’t have to do it, it’s probably wise to hold an annual meeting. Discuss the topics listed above that apply in your situation (obviously, LLCs don’t have stock options or pay dividends so these topics aren’t relevant) and keep a record of what you discuss.
