Let’s assume you have a really bad day – your business is selected for audit. One of the things the IRS agent (or auditor from your state) is going to ask you for is paperwork. And this is one of those cases where the more, the better.
They’ll want to see copies of your minutes, copies of your stock transfer book and PLEASE pay attention to this one – copies of the promissory notes proving that the money you put in should be loans and the money you took should be a loan. Of course, not all of the money you put into your company is a loan. Sometimes it’s for buying the initial stock. A lot of times in the rush to get a company set up and a business rushing, you might forget about the need to think for a minute about how the money you put in should be split. What is a loan and what is stock? The difference sets the basis (which you will want to know for a later sale) or creates a way for you to pull money out in the future.
If you do pull money out, is it salary? Is it a dividend (or distribution)? Or is it a loan? The difference has a lot to do with the amount of tax you’ll pay and without the right loan paperwork, you can’t prove a thing. So, as you’re wrapping up your year end paperwork and getting ready to send things in to your tax preparer, don’t forget to make sure you have the documentation you need to prove what happened this past year.