Running a successful business is in the details
Posted September 24, 2007 — No Comments
Business structures such as a limited liability company (LLC) , Limited Partnership (LP), S Corporation and C Corporation are legitimate, legal structures. When you form one of these entities, you also reap certain benefits in terms of tax savings, limiting liability, protecting assets, etc. However, in order to enjoy these benefits, you need to meet the specific requirements set forth by the federal government and states in order to preserve that business structure. Too often, business owners form one of these entities, file their articles of incorporation/bylaws and begin operating their business. Unfortunately, many tend to forget to keep up with holding regular director and shareholder meetings, keeping complete corporate minutes and filing the appropriate annual reports with the state.
Besides the fact that these are important requirements for owning one of these business structure, failure to maintain these standards could potentially lead to several problems. Problems that will require business owners to either pay out or loose money. For instance, the IRS likes to scrutinize business structures, especially when it comes to qualifying deductions. If you find yourself being audited, do you know one of the first things they are going to ask for? You guessed it, copies of your minutes and corp./LLC documents. They want to ensure that you have indeed been operating as a corporation or LLC and have been holding meetings and recording minutes diligently to prove it. If you respond, “I don’t have them,” or “They’re not quite up to date,” chances are pretty good that you are going to loose deductions. Why? Because without those records, you can’t say you have a legitimate business structure in place. You MUST operate your business like a business and follow the correct business formalities. If you don’t, the structure can’t benefit you.
Another potential problem should you fail to hold meetings and keep adequate records comes into play should a court action ever be brought against you and your company. Having a strong ongoing record of your business activities ensures that you have operated your business with the highest integrity and have documented all relevant key activities. It lends legitimacy and credibility to your business dealings and informs the court that you are in compliance with the law’s requirements as they relate to your business structure.
Finally, failure to meet the requirements of a business structure may potential lead to a situation where your shareholders, officers, and directors find themselves held personally responsible for the acts of the business. This is commonly referred to piercing the corporate veil and opens everyone up to personal liability.
Meeting the ongoing requirements necessary to operate a corporation, limited liability or partnership is an absolute must. Holding shareholder and director meetings to elect officers, keeping detailed records of all relevant meetings and business activities, and filing all annual state documents may take time out of your day, but better that than money out of your pocket and possible dissolution of your business structure.
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