CORPORATE HANDBOOK



Prepared by: Timothy P. McAloon

Marshall, Crane & McAloon, P.C.

69 Winn Street

Burlington, MA 01803-4870

(781) 270-0181

(617) 479-5830 Quincy

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I. INTRODUCTION

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This Handbook is intended to provide answers to some general questions commonly asked by individuals after the formation of a closely held corporation and to provide general recommendations for your consideration. This is not intended to cover most tax or other planning issues and you should consult your advisors on a periodic basis to discuss specific tax or planning issues.

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II. TAX MATTERS

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A. Taxpayer Identification Number

A taxpayer identification number must be obtained from the Internal Revenue Service as soon as possible after forming the corporation.

B. Coordination of Initial Tax Matters

Your accountant should be consulted to determine whether an S Corporation election should be made. This election must be made within 75 days after the formation of the corporation. Your accountant should also be consulted to help coordinate the payment of all taxes required to be paid to the Internal Revenue Service and the Massachusetts Department of Revenue (i.e. employee withholding taxes, sales taxes, estimated income taxes etc.).

C. Filing of Annual Income Tax Returns

Federal and Massachusetts Income tax returns must be filed for the corporation annually and this should be coordinated with your accountant.

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III. OPERATING AS A CORPORATION

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A. Legal Considerations

It is very important to follow corporate formalities to help ensure that you obtain the benefit of the limited liability protection afforded to owners of a corporation (the stockholders). Generally, the stockholders are only liable for the debts of the corporation to the extent of the assets of the corporation. Thus, if the debts of the corporation exceed its assets the stockholders are usually not personally liable for the difference. Some exceptions to this rule would be if a stockholder personally guarantees debts of the corporation or personally engages in conduct which exposes him or her to personal liability. Similarly, if corporate formalities are not followed in operating the corporation, creditors of the corporation can argue that the limited liability of the corporation should not extend to the stockholders and they should be held personally liable for debts of the business.

It is also important to follow the corporate formalities to ensure that the corporation is treated as a corporation for tax purposes and thus avoid potentially adverse tax consequences.

B. Execution of Contracts and Documents

All contracts and documents should be entered into by and signed in the name of the corporation (i.e. John Doe, President of Doe, Inc.). Do not sign in your individual name (i.e. John Doe).

C. Employment Matters

If the corporation is going to have employees who are not also stockholders, you should be aware that a number of federal and state laws require the posting of notices at the jobsite. The laws often provide for fines in the event of failure to post the notices. Moreover, in some cases a short six-month limitations period for filing discrimination claims has been extended where the employee claimed ignorance of the law and no notices were posted. The notices can be obtained free from the appropriate governmental agencies or, for a small fee, from private companies which will also keep you apprised of any changes in the notice requirements.

There is legislation in Massachusetts which requires employers with six or more employees to adopt a sexual harassment policy. Once adopted, the policy must be distributed to all current employees, provided to newly hired employees and posted in a prominent area of the work place. The law further requires that the policy be distributed annually to the employees. The Massachusetts Commission Against Discrimination has prepared a Model Policy which conforms to the requirements of the law.

The corporation should also enter into employment contracts with its employees. Standard employment contracts with regular employees can be used to establish that they are employees “at-will”, who can be terminated with or without cause at any time (provided, of course, that the firing is not discriminatory or against public policy). Employment contracts with officers and other key employees are useful for a number of reasons, including helping to establish reasonable compensation for tax purposes and helping to prevent key employees from leaving and competing against the corporation.

D. Use of Corporate Letterhead

Corporate letterhead with the corporations full name should be used in all business transactions and correspondence.

E. Establishment of Corporate Bank Accounts

Corporate bank account(s) should be established and all income generated by the business should be deposited into the business account(s). Similarly, all payables should be paid out of these account(s). Monies generated by the business should not be commingled with personal bank accounts or accounts of other businesses. When opening bank accounts for the corporation, a corporate authorization should be completed stating who is authorized to sign checks and withdraw funds.

F. Management of Business by Directors and Officers

The Directors have the ultimate authority and responsibility to manage the business. The Directors will normally delegate the day to day management functions to the officers of the corporation.

G. Corporate Votes

Any corporate transaction outside of the normal course of business (i.e. lease or purchase of office space, borrowing of money, purchase of a significant asset, issuance of stock, etc.) should be approved by the required vote of the Board of Directors and/or the Stockholders.

An Annual Meeting of the Board of Directors and the Stockholders should be held to elect new officers and Directors for the next year and to approve any corporate actions that require approval. In a closely held corporation, the annual “meeting” often merely consists of the Directors or Stockholders signing a written consent form in lieu of an actual meeting. Even if there are no new Officers or Directors or corporate actions that require approval, minutes of an Annual Meeting reflecting the Officers and Directors and ratifying the past years corporate actions should be prepared, signed and filed in the Corporate Minute Book.

H. Filing of Required Documents with the Secretary of State

An Annual Report must be filed with the Secretary of State’s office each year. The filing fee is $125.00 and the report must be filed within 2 ½ months after the corporation’s year end or a $25.00 late fee will be imposed. In addition, if the Annual Reports are not filed for two or more years the Secretary of State has the statutory authority to dissolve the corporation.

If the corporation changes either its business address, its Officers or Directors, or its year end, you must file appropriate forms with the Secretary of State’s office to notify them of the change.

If you want to change other information contained in the Articles of Organization (such as the name of the corporation, the number or type of shares authorized to be issued, or other provisions) Articles of Amendment must be filed with the Secretary of State.

I. Maintaining a Corporate Minute Book

A Corporate Minute Book should be kept which contains the following:

1. A copy of the Articles of Organization;

2. A copy of the By-Laws;

3. Copies of the minutes of all corporate votes, including the minutes of the Incorporators;

4. A register listing the stockholders, the number of shares issued to them, the date of issuance and the amount paid for the shares;

5. Copies of reports filed with the Secretary of State’s office and other important corporate documents.

J. Change in Corporate Structure

If you contemplate changing the corporate structure in the future (such as issuing new stock, adopting a new class of stock, admitting new stockholders, merging or liquidating the corporation, etc.), it is imperative that you obtain legal and tax advice prior to approving the changes.

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