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 accountant’s focus on these documents is often very different from what your corporate attorney might focus on. If your accountant does not have these papers, 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.
Certificate of Incorporation: 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.
Certificate 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 worth 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.
Bylaws: Bylaws 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 that your CPA performs to establish the reasonable compensation for various officers. If someone has a title and is being compensated, the officer title and description of responsibilities should be consistent with the compensation.
Shareholder Agreement: 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 buyout, 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 your CPA.
Stock Certificates: 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 tax headaches.
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.
Stationery: Why should your accountant care? Because the corporate name, the use of the “Inc.” or other corporate designation, the 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 is a good step for your accountant to open up the discussion of your adhering to corporate form. That is important for tax, asset protection and other reasons.
Notes: Loans are a hot issue for closely held businesses. Undocumented loans from the corporation could be re-characterized 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).
Consulting and Employment Agreements: 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.
Annual Minutes: 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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