ASK THE EDD LAWYER – HOW IMPORTANT IS IT FOR ME TO PREPARE ANNUAL AND SPECIAL MINUTES FOR MY SMALL CALIFORNIA CORPORATION?
by Robert S. Schriebman
Do you do business as either a “C” or “S” small corporation? Do you prepare annual corporate minutes of meetings of shareholders and directors? Do you prepare special corporate minutes for extraordinary or major transactions that may occur during the year? Do you keep these minutes in a binder and in a safe place? If you answered yes to the first question and answered no to the other three you could be putting yourself in harms way with the EDD, IRS, and FTB. Let me explain.
A prospective client, under audit by the EDD, recently consulted me concerning information and documentation requested by the EDD auditor. The item on the long list prepared by the auditor stated “Articles of incorporation/minutes of meetings.” I had known for a long time that income tax audits of corporations conducted by the IRS and FTB often required the production of these basic corporate documents . . . but the EDD? I think we are seeing something new.
It is not enough to form a corporation using either an attorney or one of the “on the cheap” incorporation services. The corporation must be maintained, and part of that maintenance is the creation of corporate minutes. If these minutes are not properly kept up the EDD may elect to disregard the corporate entity as not being a legally viable corporation. This could mean big trouble down the road when the EDD issues a final assessment. If the EDD disregards your corporation it will assess you personally by bypassing the corporation, i.e. treating the corporation as though it does not exist. We will not discuss the huge problem this can generate with the IRS when it comes to income tax and payroll tax assessments.
Before we discuss the types of corporate minutes and their components a few words of caution are necessary.
1. Never treat a corporate shareholder or officer as an independent contractor. Shareholders by law are statutory employees. Failure to honor this law could mean large tax assessments and stiff penalties.
2. Never give a tax auditor original documents. Most likely you will never see them again. Give only photocopies.
3. Never “phoney-up” corporate minutes by preparing several years of corporate minutes and backdating them. Never think you can fool any auditor by backdating documents.
Two Types of Corporate Minutes – Annual and Special
There are two types of corporate minutes – annual and special. Every year, at a date designated in the corporate bylaws, a corporation is required to hold two meetings simultaneously. The first meeting is the Meeting of Shareholders. The purpose of this meeting is to elect members of the Board of Directors. The second meeting is the annual meeting of the Board of Directors. It is the job of the Board of Directors to elect four corporate officers: President, Vice-President, Secretary, Chief Financial Officer (Treasurer). In California one individual can hold all four offices if the corporation is legally deemed a small corporation.
The Board of Directors will also prepare a formal Employment Agreement to hire its Chief Executive Officer for the upcoming fiscal or calendar year.
The second type of meeting is known as a “Special Meeting.” Special meetings can be held at any time during the year to approve extraordinary transactions such as the signing of a new lease or the purchase of machinery and equipment. Special meetings are also held if the corporation is hiring outside services such as an attorney, CPA firm, or independent consultant.
We have provided you examples of annual corporate minutes together with a sample employment agreement. Please see Article No.77.
©Robert Schriebman 2013.
An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angles County serving clients throughout California and the United States. As a trusted EDD lawyer, Robert Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.