A new year is on the horizon which encourages business owners to think of ways to innovate and grow their businesses. While you are trying out new ideas and strategies, it's important to remember some fundamentals.
One of these fundamentals for owners of S-Corporations are the bylaws of the business. S-Corporations are required by state law to adopt bylaws. Bylaws contain the overall guiding principles of the business and lay out the management structure and operating procedures.
Bylaws play a vital role in organizing and managing the corporation. At a minimum, bylaws should contain the following:
- Corporate Name
- Office Location
- Purpose of Corporation
- If there are board members, their roles should be spelled out in the bylaws along with qualifications, term lengths and other rules and responsibilities
- Appointed committees, if applicable
- Periodic meetings, at least annually, of members
- Rules on notification, attendance
- Number of Stocks and how they are valued
If any of the above has changed since the original bylaws were created, it is a good idea to amend the bylaws. Failing to change bylaws appropriately can ultimately lead to a violation of state law which can allow the State to invalidate the business as a separate entity.
Another fundamental is preparing annual corporate minutes to reflect major decisions of the S-Corporation during the year. Having annual corporate minutes is important in case of IRS audit.
A final fundamental to consider is determining the “reasonable” compensation for the owner/employee of the S-Corporation. What is “reasonable” generally depends on the specific facts/circumstances of the business as well as the general nature of the industry. Once the “reasonable” compensation has been determined, it should be documented in the corporate minutes.
If you need to have bylaws or corporate minutes created for your S-Corporation, or if you think your current bylaws may need to be amended, please give us a call.
Jeffrey D. Cohen, Esq., C.P.A.