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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.
***************************************************************
© 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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