Audit proof your business.2019-01-05T15:07:57+00:00

Accounting Policies and Shareholder or Operating agreement

To satisfy the tax authorities, every business should have accounting policies and procedures in place. These policies if carefully followed makes an audit goes smoother. This will normally suffice, if the entrepreneur is a sole owner. The policies also makes it clear that the individual is acting separately from the business entity. This makes it easier to transition roles as the business grows.

Moreover, if you are registered with the Secretary of State as a LLC or corporation you are required to have either bylaws, operating or shareholder agreement. LLCs owners (aka members) should create an operating agreement while corporate shareholders should have a shareholder agreement.  These agreement dictate how the business is run and terminated. It protects you in case of disagreement with your partner. If you have a business partner, I highly recommend you visit an attorney to draw up an agreement. You will be glad you did when a disagreement arises.

When no  bylaws, operating or shareholders agreement exists, the business is subject to the default rules of the state when faced with a legal dispute.  Most state adopt some variation of the uniform rules. You can find the uniform rules:

  1. Click here for corporations
  2. Click here for LLCs (928 downloads)

For most very small business sole owners, this is usually not a big concern especially if sound accounting policies and procedures are developed and closely followed. However, contact an attorney to find out specifics for your situation.

At a minimum, every business should have written accounting policies and procedures.

Operating agreement

The operating agreement is a document that outlines the roles and responsibilities of the members (owners) of the organization. It also governs how the business will operate.

The key elements of an operating agreement are as follows:

  1. Who owns what
  2. Required contribution
  3. Profit allocation
  4. What expenses are reimbursed
  5. How and who manages the business
  6. How and who keeps the accounting record
  7. What happens if the company is dissolved
  8. Restrictions on sales of business shares/ units
  9. Other general provisions

You can find a sample template here.  Operating agreements are matters of law and not accounting. An attorney can help you revise or draw up an agreement.

Shareholders agreement

A shareholders agreement is an agreement between the shareholder and the corporation. When operating a business, the business owner and the business are two separate entities and should be treated as such. You should not treat your business like an extension of you. As a Certified Public Accountant I am concerned about the shareholders agreement addressing certain accounting issues. Some issues you should have in your agreement are:

Capital contributions

The shareholder agreement should discuss who decides the capital needs of the corporation. Once the need is determined, it should say who is responsible for meeting these needs, how much of the need they are responsible for and how soon they have to meet these needs.

Distributions

How much profits the corporation keeps and how much is distributed to the shareholders should also be discussed

Salary of corporate officers

The shareholder agreement should state who determines corporate officers salaries and when it is determined.

Meetings

The frequency of meetings and purpose should be documented in the shareholders agreement.

Day to day operations

The shareholders agreement should discuss who is responsible for day to day operations and signing contracts on behalf of the corporation

Reimbursed expenses

The shareholders should discuss how business expenses paid with personal funds should be handled. The corporation might approve payments with personal funds for reimbursements or might require shareholders to claim these expenses on their personal tax returns.

Financial records

Where and who keeps the financial records should also be documented. Also, the frequency of creating financial reports for review should be addressed.

Taxes

Finally, the shareholder agreement should state who is responsible for filing the tax return.

These items mentioned here may seem simple but having them in place can reduce arguments if something goes wrong. For instance, if the tax return was not filed, the operating agreement will clearly state whose responsibility it was. Also, having an operating agreement makes it clear to shareholders what their responsibilities are.