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HOME > Money > Operating an S corporation

Operating an S Corporation

by David Berky

Owning and operating a small business can be a very rewarding experience, emotionally as well as financially. Or it can be an absolute nightmare if you don't structure and operate your business properly.

Never underestimate the resources of a good lawyer and accountant. They can help you avoid problems and even get you out of trouble you may stumble into.

The law considers your corporate a separate entity. It has a birthdate (the date of incorporation), and can have a death date (the date you close the corporation). It can enter into contracts and agreements and has the same responsibilities as you would.

As a separate entity, your corporation can protect you from lawsuits and asset seizures arising from the operation of the corporation (as long as you are not personally negligent or irresponsible). Many people see this protection as the main reason for forming a corporation vs. operating as a sole proprietor without any protection.

But in order to be considered a separate entity, you have to run your corporation according to some rule, laws and guidelines. The following information touches on two aspects of operating your corporation as a separate entity: Corporate Accounting and Corporate Minutes.

Corporate Accounting

Your corporation should have its own bank account and Employer Identification Number (EIN) issued by the IRS. This helps to establish the corporation as an entity, separate from its stockholders and officers.

Accounting records should be kept to record income, expenses, assets (equipment, real estate, intellectual property, etc.) and liabilities (debts, loans, mortgages, etc.). It is recommended that you retain an accountant to help with the accounting functions, year-end taxes and payroll taxes.

Your accounting system can be as simple as a set of spread sheets (on paper or a computer). Or you can purchase accounting software such as QuickBooks, Peachtree, MYOB, etc. You may want to have your accountant help you set up the computer software so that you have all the accounts you will need. Also your accountant can help you learn how to enter different transactions. (Don't ask them during March, April or October - IRS tax deadlines.)

Or consult with your accountant and develop a plan for recording your business activities and turning the information over to your accountant to be put into a computerized system either monthly or quarterly. This costs more for the accountant's services but can save you a lot of time and headaches (and money) if you get in trouble with the IRS or your state/city taxing agencies.

Corporate Minutes

Incorporated businesses are required to keep minutes of the activities of the business. Minutes are the voice and history of the corporate entity and can be used in court cases. Minutes also show that the officers/stockholders of the corporation are operating the corporation as an entity and not just an extension of themselves.

Officers and shareholders can lose the protection of the corporate entity if they do not operate the corporation as a corporation; this includes keeping accurate minutes.

These minutes can be as simple as a dated note written on a piece of paper and inserted into a three ring binder. Corporate minutes don't have to be on fancy paper or letterhead and don't have to use any special language style (legalese, corporatese, etc.). Corporate minutes should be clear and understandable.

It is recommended that the corporate minutes be typed, include a date, names of participants and signatures of participants or corporate officers.

Things to include in the minutes:
  • Authorization to open a bank or credit account.
  • Major purchases of equipment, assets, other businesses.
  • Summary of marketing or advertising campaigns.
  • Summary of business growth initiatives, projections and goals.
  • Business plan, mission statement, corporate objectives, etc.
  • Quarterly and yearly financial records.
  • Major stock sales, purchases or transfers (almost every stock activity in a small business will be "major").
  • List of stockholders, names, addresses, number of shares and percentage of total shares issued (update once a quarter with quarterly financials if any changes).
  • Hiring, firing of corporate officers or contractors.
  • Notes of board meetings and stockholders meetings (at least one official meeting with minutes should be held each year).
  • Any other significant business events.
Conclusion

There are few things more satisfying than building a business from scratch. There are few things more trying than fighting personal lawsuits and the IRS. Operating your corporation properly will allow you to focus on running your business rather than defending it or yourself. It takes an extra investment of time and money, but just consider it additional insurance, both financial and for your peace of mind.

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Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. a marketing company that sells simple software under the brand name of Simple Joe. One of Simple Joe's best selling products is Simple Joe's Money Tools - a collection of 14 personal finance and investment calculators. This article may be freely distributed so long as the copyright, author's information and an active link (where possible) are included.


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