Your CPA should have a number of key documents from
your closely held business in what CPAs call a "permanent file". The comments next to each item explain
some of the ways your CPA might use these documents. Your accountants focus on
these documents is often very different from what your corporate attorney might
focus on. If your accountant doesn't have these, important issues could be
missed, or you could be left defenseless in the event of a tax audit. If your
CPA is missing any of the items below, be sure to get him the documents.
More than 2 million closely held businesses are organized as
S corporations which are only permitted one class of stock. A second class of
stock can exist but only if it differs in voting rights, not economic rights.
The Certificate can list key rights of shareholders and other items that might
affect projections, distributions and other work your CPA does.
Amendment to the Certificate.
If there are any amendments to the
Certificate your CPA should review what was changed as it might affect any
financial reports issued. For example, new classes of stock might be issued,
the number of shares authorized might be changed, etc.
authorization in Other States.
If the corporation is authorized to conduct business in other states
your CPA may have tax filing issues in those states, and have to revisit the
allocation of income between the various states where activities occur. The
opposite might also be wroth investigating. If your CPA is filing tax returns
in states other than where your corporation was incorporated he should alert
your attorney to address the requirement to have the corporation authorized to
do business in those states.
provide a host of details as to the operation of your corporation that may be
important for your CPA to know. The titles and responsibilities of the different
categories of officers of the corporation are listed in the bylaws. This could
affect an analysis your CPA performs to establish the reasonable compensation
for various officers. If someone has a title and is being compensated that officer
title and description of responsibilities should be consistent with the
There is a raft of points your
accountant should review and consider. If specific reporting requirements are
mandated (e.g. the type of statements to be issued) these should be adhered to
but your CPA cannot do that without reviewing the agreement. Testing of
formulas (for buy out, compensation, etc.) to make sure they work and are
funded is an important role for your CP A.
Working capital, distribution and other provisions may require monitoring by
In too many cases the ownership percentages listed on the Form 1120-S K-1s (S
corporation returns) differ from the actual shares issued by the corporation. This
can occur if gifts are made but the documentation not completed, etc. It is
important that the tax returns and corporate records agree. Failing to do so
could undermine gift programs, trigger assignment of income issues, and other
Corporate Bank Account.
A copy of a bank statement will enable
your accountant to confirm that the title and tax identification number on the
account are correct. Frequently, especially as a result of truncating long
entity names account information can be incorrect. When there are many
different entities the risk of mixing up accounts and undermining the integrity
of the entities involved can be significant.
should your accountant care? Because the corporate name, use of the "Inc." or
other corporate designation, listing of offices and a host of other matters
could have implications that are important. Real businesses have letterhead,
correspondence files, etc. Checking letterhead might be simplistic but it's a
good step for your accountant to open up the discussion of your adhering to
corporate form. That's important for tax, asset protection and other reasons.
Loans are a
hot issue for closely held businesses. Undocumented loans from the corporation
could be recharacterized as dividends, salary, or other forms of distribution. Undocumented
loans to the corporation could be characterized as capital contributions. In
addition to these tax problems, undocumented loans are a significant factor
cited by claimants seeking to pierce through the corporation to reach
shareholder personal assets (piercing the corporate veil).
Appropriate characterization as an employee or
independent contractor is essential to comply with state and federal
withholding tax requirements, insurance coverage and more. Your CPA can review
these agreements to assure tax compliance.
Salaries, bonuses, working capital,
loans, gifts of shares, and other key decisions that involve your CPA are often
noted in annual corporate minutes, or if not should be. These minutes can be
vital in the event of a tax audit.
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