Why Do I Need to Comply with the Required Corporate Formalities?

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Met a former business owner and his spouse at a networking event recently. The husband used to own a corporation. Funds were tight and he missed some payroll tax deposits. Then he missed a few sales tax deposits. Next thing you know the IRS and State of Ohio filed liens and levies to collect the unpaid tax.

The corporation went out of business and liquidated. The delinquent federal and Ohio taxes were not paid. The IRS and Ohio went after both the owner and his spouse for payment of the "trust fund" portion of the taxes arguing that each was a responsible person. Generally a responsible person is an officer, director, shareholder of a corporation who has the power and authority to make payment decisions. The owner now says that his spouse is not a responsible person since at the time the tax liabilities arose only he was a shareholder, director and officer of the corporation.

I suggested he could easily prove to the tax authorities that his spouse was not a responsible person by showing them copies of the corporation's stock certificates, stock ledgers, corporate resolutions and other documents that listed only the owner as a shareholder, director and officer at the relevant times. He was a bit embarrassed to admit he never kept a corporate record book or did annual minutes, and he really had no documents to show the tax authorities to disprove their assumption that both the owner and his spouse were responsible persons.

To add insult to injury, the failure to maintain the corporate record book gave the tax authorities support for their argument that they should be permitted to "pierce the corporate veil" and go after both the owner and his spouse for all the corporate taxes (not just the trust fund portion) as partners.

At times it can seem a bit troublesome to prepare annual minutes for a small corporation. But the annual cost to maintain a corporate record book is low when you compare it against the problems that can arise from failure to comply with the required corporate formalities.

AND ONE MORE THING.  Shahrzad Allen of Pickrel, Schaeffer & Ebeling and others will be presenters at the Immigration Reform Leadership forum sponsored by the Dayton Hispanic Chamber on June 19^th from 7:30 to 9 am.  The event will be held at the Hilton Garden Inn in Beavercreek.  The cost is $20 for non-members and $15 for non-profit organizations.  Continental breakfast will be served.  For more information, visit DHC’s website at  www.daytonhispanicchamber.com.  Or contact Jeff Senney jsenney@pselaw.com or Jan Burden jburden@pselaw.com.