The dental attorneys at Nardone Limited in Columbus, Ohio frequently advise our clients on minimizing disruption and maximizing their profits within their dental practices. This advice includes employment matters, dental board matters, tax matters, and many others. And certainly, one of the areas that we cover is the importance of preventive maintenance and due diligence prior to a complication arising. As part of that advice, there are certain compliance issues that we should be routinely considering on a yearly basis within our dental practice.
General Background Regarding Legal Audit Checklist and Minute Book
Thus, from a compliance standpoint, it is that time of year again when we advise our dental practice clients and follow-up with them regarding our legal and business audit checklist, as well as the necessity of updating their dental practice minute books. Unfortunately, our experience over the years has been that our dental practices do not follow their own advice. That is, dentists advocate that patients should have regular check-ups and examinations to avoid periodontal disease, as well as other complications. As part of that regular check-up and exam, the dentists are looking at many things, including the color and firmness of the gums to prevent periodontal disease. Yet, when we talk with many of our dental clients about following the same process when it comes to regular check-ups concerning their dental practices—including completing the legal and business audit checklist, as well as preparing their minute books—in many instances, our advice and guidance fall on deaf ears. Yet, we will continue to push back and raise this concern with our dental clients, no different than the dentist does with their patients. It is all about preventive maintenance. As we say on our website, an ounce of prevention is worth a pound of cure.
With that said, we will discuss the legal and business audit checklist, from a client perspective, as well as the preparation of minutes and updates of minute books in a series of blogs. To start the series, this initial blog will be the general discussion regarding the importance of minute books and why we should have a minute book.
Minute Book Checklist
Comment from Vince Nardone regarding the minute book checklist:
As a business owner myself, I know how hard it can be to stay on top of the administrative tasks of running that business. But, maintaining your dental practice minutes are one of those important steps that we do not want to forget or procrastinate about. I know that there are some business owners out there that will say, “I never did this before, and nothing has happened.” Well, that may be true. But, I can also list out numerous examples of others where something negative did happen. So, why leave yourself exposed? Here are some thoughts and reasons from commentators as to why we need to ensure our minutes are up-to-date:
- First of all, what are minutes? The minutes document the essential information that was discussed in any decisions that were made during meetings or within the business over the past year. Minutes help us capture the purpose of the meeting and what was agreed upon and what the outcome was of that particular meeting or decision made by the business owner.
- The minute book leaves a trail that enables owners and attorneys to look back at the decisions and transactions of a dental practice. The minute book is an important audit backup. With it, one can determine effective dates for tax purposes and establish justification for the accrual of expenses and fixed obligations.
- Up-to-date records can help you avoid challenges to the dental practice’s authority to take certain actions. These challenges might come from other owners, employees, or most importantly, governmental agencies. Your minutes are important records of the authority granted to the dental practice’s officers and directors to act.
- The minute book establishes the background record needed by your lawyer to support certain legal opinions. When a dental practice undertakes a significant transaction, it is often necessary to obtain a legal opinion regarding the practice’s history, as well as current authority for such a transaction. An example may be something as simple as securing certain types of financing and other banking relationships. The minute book provides evidence that the dental practice has done everything it is supposed to do.
- The dental practice’s minute book should include ownership records. This section needs to be kept current because it is the one true ownership record of the dental practice. Ownership is not officially recorded anywhere else. Your minute book should reflect exactly when and to whom ownership interest has been transferred, particularly if the dental practice is an S corporation.
- The minute book records any amounts that the dental practice intends to pay as compensation and dividends, including to its employees. It records the granting of authority to make contributions to qualified retirement plans. It is much more difficult for the IRS to prevail in treating an intended deductible payment to an owner as a dividend if the minute book contains a contemporaneous record of authorization of compensation, bonuses, rent, or other deductible payments.
- Besides being required by law to perform this annual task, there are benefits. One of the reasons you established a separate entity to conduct your business may have been to shield your personal assets from the debts and liabilities of your dental practice and to limit your personal liability associated with the business. If proper dental practice records and minutes are not maintained, an adverse party may attempt to pierce the corporate veil of protection and seek to reach the owners for personal liability. Although your dental practice may have been properly formed initially, if you are not updating your minute book, a claim can be made that your dental practice is not actually conducting business as a dental practice. Failure to maintain proper dental practice records is one way an adverse party may seek to prove that your dental practice does not legally exist, and, if successful, remove the protection afforded by doing business as a validly existing dental practice.
- While accurate dental practice minutes may help to prove the existence of a dental practice in a lawsuit, they can settle internal disputes as well; for example, the acceptance of a contract, approval of mergers, authorization of loans, and compliance with governmental regulations. The dental practice minutes are in place to inform and to protect the employees of a dental practice.
- Dental practice minutes also help distinguish between expenses and dividends. Expenses may be written off, while dividends are not deductible. If a discrepancy exists, the IRS, generally, will take a position adverse to the question of the expense, which may change the expense to a dividend resulting in double taxation for the owners. In addition, if a dental practice fails to keep minutes, the IRS can consider the owners of a closely-held dental practice as individuals not operating as a dental practice. This may lead to an allocation of net income to the owners at higher individual rates.
- Consideration should be given to document and approve certain actions taken throughout the year or anticipated to be taken in the coming year, such as acquisition of credit lines or applications for loans, execution of a lease or lease renewal, and exercising options to extend employment or other contracts.
In sum, there are certain aspects of operating a business that frustrate entrepreneurs, including our dentists. Handling compliance issues, such as a legal audit checklist and preparing yearly minutes, certainly falls within one of those frustrations. But, there are certain costs of business that we have to make sure we get done. This is one of them. Once you get into the habit of doing it and working with your legal and accounting professionals, it works and becomes routine.
Contact Nardone Limited
The dental attorneys at Nardone Limited are ensuring on a routine basis that our dental clients’ practices remain compliant with federal and state law. If you are unsure whether your dental practice is compliant, contact Nardone Limited.