Five Easy Steps to Maintaining Your Corporate Status

Five Easy Steps to Maintaining Your Corporate Status

by Stephanie Morrow, December 2009

If you recently started your own corporation, some congratulations are in order. You chose your business name and registered it. You created your articles of incorporation and bylaws. You even selected your directors. But in addition to managing your business, you've got to make sure to keep your corporation in good standing by following a few state regulations.

While corporations have many benefits--liability protection for owners, tax advantages, and the ability to enter into contracts--they come with a few strings. Most significantly, a corporation is regulated by state law. Running a corporation takes more than fulfilling the day-to-day responsibilities of the business. Failing to abide by corporate responsibilities can result in negative legal consequences, including hefty fines. Below are some helpful steps that you can follow throughout the year.

Hold Shareholders' and Directors' Meetings

By law, you must hold annual shareholders' meetings and periodic directors' meetings, in which the corporation's business activities are reviewed and discussed. At the shareholders meetings, people who own stock in the corporation have the right to elect or remove directors, amend the articles of incorporation and bylaws, approve the sale of corporate assets and mergers, and dissolve the corporation.

At directors' meetings, directors have the authority to issue stock, elect corporate officers (those who are responsible for the day-to-day operation and management of the corporation), set the salary amounts of employees and officers, make real estate decisions, and approve loans.

Document Shareholders' and Directors' Corporate Decisions

According to state law, corporations must not only hold meetings, they also have to record the minutes of these meetings, documenting all decisions made by shareholders and directors. More specifically, a corporation's minutes must document the actions at directors' and shareholders' meetings, the issuance of stock to shareholders, the purchase of property, the approval of a lease, the authorization of loans or other lines of credit, the adoption of stock options or retirement plans, and any significant federal or state tax decisions. Documenting these situations will maintain an owner's limited liability status and protect the owner if questioned by creditors or audited by the IRS.

Maintain a Separation Between the Corporation and the Owners/Officers/Directors

Make sure the corporation's owners, officers and directors sign all documents in the name of the corporation, not their individual name. This includes any banking activities, such as checking accounts, loans or other banking procedures, as signing them in an individual's name would make that individual personally liable for the financial obligations. In addition, all contracts and leases should also be handled in the same manner.

Keep Detailed Financial Records

A corporation must use a double-entry bookkeeping system to record business transactions, and maintain financial records for the corporate tax return. Double-entry bookkeeping is the accepted standard method for recording all approved financial transactions of a business. In double-entry accounting, the financial activities of the business are documented in two accounts, as a credit and a debit. These accounts also keep a record of any changes in monetary values of the corporation.

File a Separate Corporate Income Tax Return

If you are confused about which tax forms to file for your corporation, you are not alone. Corporations must file and pay taxes on a corporate tax return that is separate from its owner. The owner must then file a separate personal income tax return because he or she is paid a salary just like any other employee.

It is important to note that C-corporations are taxed differently from S Corporations. Forming a C Corporation is necessary for those companies intending to sell shares to more than 100 investors. Smaller companies with fewer investors can elect to form an S Corporation.

A C-corporation is taxed as a traditional corporation. This means that company income is taxed once as corporate profits, and then taxed again when profits, or dividends, are distributed to shareholders. This is often referred to as "double taxation." However, since the corproation has already paid tax on its earnings, the dividends distribution qualifies as a "qualified dividend" at the lower 15% tax rate.

A C-corporation pays taxes using tax return Form 1120, and the return is due 3 and 1/2 months after the last day of the corporation's fiscal year.

On the other hand, if you have made the election to be taxed as a pass through entity by filing Form 2553 your corporation is known as an S-corporation. S-corporation status allows business profits and losses to "pass-through" the corporation to the owners. The corporation never pays taxes on its profit and loss. By passing profit (or net losses) through to shareholders, the S-corproration's profits are only taxed when they appear as income on a shareholder's individual tax return Form 1040.

An S-Corporation pays taxes using tax return Form 1120S, and the tax return is due 3 and 1/2 months after the last day of the corporation's fiscal year.

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