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"S" Corporation needs end-of-year Checklist

This article by Stuart Adams appeared on January 11, 1998 in the Louisville Courier Journal Small Business Q & A section.

It was written on behalf of the Louisville Bar Association

Q: I own a small business which was formed as an "S" corporation with several other stockholders. Are there any steps my company should take at the end of the year to remain in "good standing?"

A: You should develop a checklist with your, attorney, accountant and other business advisors of matters which your company should review on an annual or more frequent basis. While every business may have unique issues to monitor, along with its annual budget, business plan and marketing plan, there are many fairly typical issues to place on your annual checklist. Some of the following matters may not apply to partnerships, limited liability companies or some other types of business entity, but many of these items will apply to any business.

All corporations are required in Kentucky to file a short and simple annual verification report with the Secretary of State and pay a minimal fee. Easy as this is, many companies are "administratively dissolved" for failure to do this, meaning they cease to exist as a legal entity. This happens when they move or the Secretary of State’s Office loses contact with the corporate agent. Simply paying taxes is not enough, since the computers of the taxing authorities and the Secretary of State do not necessarily talk to each other.

The bylaws of other operating agreements of many businesses require them to conduct an annual meeting of stockholders and board of directors to select new officers and directors for the next year. Despite this, many companies simply forget to do this in the press of everyday business, potentially raising questions about the authority of those individuals or groups to act on behalf of the business entity.

Year end is a perfect time to review financial and competitive performance of the business, to build on success and minimize repetition of failure. Examples are bonuses, raises and retirement plan contributions for performance rewards, or demotion, progressive "discipline" or termination of unrehabilitatable employees. Such fiscal decisions should also consider loans to or from the company, including interest rates and impact on the solvency of the company. A review of the terms of real estate and equipment loan rates and terms should also occur, since minor adjustments could result in big changes in the company bottom line.

The existence or current relevance of a stock buy-sell agreement, partnership agreement or LLC operating agreement should also be examined. The mere existence of this document, which defines the rights and price at which stockholders, partners or other equity members of the business may sell or retain their equity in the company, can be the best "insurance" policy the company has to prevent major problems later. It can prevent loss of "S" election status by preventing transfer to non-qualified stockholders, can keep the stock ownership restricted to "working" stockholders, and prevent migration of the stock to the estate, divorcing spouse or judgment creditors of the original entrepreneurs, none of whom are likely to have the same feel for the business as did the founders of the business

Another often forgotten area of review is the type and coverage of the company insurance. You may have premises and workers compensation insurance, but have you updated what it covers? Have you added equipment, expensive computer hardware, software and databases which could not be fully replaced at today’s cost under your policy, in the event of fire, theft or lightning strike? Do you have business interruption insurance which would allow you to retain employees and pay creditors if you are shut down due to fire, flood or windstorm? Do you have expensive personal laptops at the office or business equipment at the home of others which might be excluded under the insurance policy. Who is the insurance company obligated to pay in the event of loss? Small and start-up businesses commonly forget to transfer or lease personal computers and motor vehicles to the company where they are used and left every day. A business exclusion on a personal policy could result in a total uninsured loss.

Finally for this article, have you reviewed your noncompetition and nondisclosure agreements with key officers and employees? Have you enacted a trade secret policy, an e-mail policy, reviewed employment law changes related to family leave and employees with disabilities? All this may seem an insurmountable stack of paperwork which just gives you a headache and keeps you from attending to the real business of the company. On the other hand, a little year end collaboration with your business advisors, development of an annual checklist, and delegation of responsibility for review and action on these issues, can make the difference between ultimate success or disaster for your company.

Stuart  Adams Law Office, P.S.C.
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