One of the major advantages of forming an S Corporation for business owners is that the federal government doesn’t tax the business directly. Because the taxes are passed down to shareholders at a lower tax rate than those levied to sole proprietors, many business owners choose to incorporate. The only drawback is that even with only one shareholder, an S Corporation is required to hold annual board meetings and keep minutes of these meetings.
There are some specific rules to follow regarding annual shareholder meetings and the documentation involved. If these requirements aren’t met, the benefits of having an S Corporation can be quickly eliminated if the business ever becomes involved in a lawsuit. We’ll discuss these specific requirements, as well as what’s not required, and why keeping these records is extremely important.
Why is it Necessary to Hold Annual Shareholder Meetings?
The entire concept of meetings seems pointless. If only one individual holds any shares, there is very little point in having a vote or meeting, especially if the sole shareholder is the only person attending.
The purpose of Shareholder meetings is to provide documentation of any decisions, changes, or issues involving the corporation. Without accurate documentation there is no way for anyone to ascertain whether the business is actually being run, or whether it’s just a front for the owner’s various activities. If the corporation isn’t actually being run as a corporation, then it’s really a Sole Proprietorship, and should be treated as such.
Where Should Records of Minutes be Stored?
It’s best to keep the records in a secure place. A binder provides an easy method to provide for organization, easy access, and adding additional minutes at a later date.
When Should Meetings Be Held?
Corporations are required to hold at least one meeting per year. Additional meetings can be held at other times, but only one yearly meeting is mandatory. Business owners generally lay out the process for these annual meetings in their bylaws when they form the corporation.
Should Additional Meetings Be Held for Special Circumstances?
Corporations often hold additional meetings to discuss issues that arise prior to, or after the annual shareholders meeting. Special occasions that could necessitate a meeting would be:
- New loans
- Impending lawsuits
- Bankruptcy proceedings
A Sole Shareholder corporation might find it easier to file a written Statement of Unanimous Consent instead of going through the traditional meeting procedure.
How to Hold a Shareholder Meeting as a Single Shareholder
Schedule the board meeting ahead of time. All corporations must hold an annual meeting, but as the single shareholder, you can schedule meetings more frequently if you desire. As a single shareholder, any actions that must be taken such as adopting a trade name or applying for a loan must be accurately documented. Holding additional meetings may not be feasible. If this is the case, there is still an option to record a written statement of the board’s decision.
It’s best to create an agenda prior to holding a meeting. The agenda should contain a list of topics that must be dealt with, as well as the scheduled time for the meeting. Just because a corporation only has one shareholder, it still must demonstrate its being ran according to state requirements.
The agenda will also list the results of the decisions made regarding the topics listed in the agenda. A written record of corporate decisions and actions insure that future legal questions regarding corporate decisions can be answered in a satisfactory manner.
Make and record your decisions on the items listed on the agenda. You need a written record of all corporate decisions and actions, spelling out the specifics of what decisions were taken. Save these minutes in case any legal questions about your actions arise later.
A Word of Warning
Business owners who fail to carry out state mandated corporate formalities place themselves at risk. The legal protections afforded by maintaining corporate status could be removed by a court and business owners can bear the full brunt of any liability issues faced.