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Enclosed please find a summary of our discussion concerning corporate responsibilities which you must follow to maintain your corporate status. Failure to comply with corporate law and formalities can result in individual liability to the directors or shareholders if the "corporate veil is pierced."

This letter summarizes, for you, the importance of keeping timely and accurate corporate records and following the corporate formalities.

This letter also summarizes some of the basic powers, duties and obligations that should be considered in preserving and maintaining your status as a corporation so that you will better understand the corporate mode of business.

Your incorporation has been approved by the secretary of state and you should now hold or have already held the corporation's organizational meeting.

Upon completing the organizational meeting, you are officially incorporated; however, in order to insure the continued existence of the separate corporate entity, the following considerations should be reviewed and observed by the corporation employees, shareholders and directors.

One of the principal advantages of conducting business in the corporate form is to limit or reduce your personal liability for corporate bills and debts. In some situations the officers, directors, and shareholders may be personally liable for the debts of the corporation regardless of the corporate form.

When you begin business many creditors may not extend credit unless you sign a personal guaranty agreement. The agreement renders you personally liable for the corporation's debts. A guaranty agreement creates an express contract which makes you liable for the corporation's debts.

You can also become liable for the corporation's debts by implied actions or negligent conduct as follows:

If you disregard corporate formalities or commingle your personal interests with the corporation's assets or interests, you can open the door for an adverse party to "pierce the corporate veil" and render you personally liable for the corporation's debts. Consequently, you should never refer to your company as "my" business or "our" business. Such a statement could later be used against you as being a material representation that the business was a proprietorship or a partnership or a regular C Corporation (there might be inadvertant termination of the S Corporation) rather than an S corporation.

Let us review all contracts and credit agreements prior to signing the same so that we can make sure they do not contain hidden personal liability representations or guaranties.

1. You should read and review the Articles of Incorporation and Bylaws.

2. If the corporation will engage in retail or rental business, or perform taxable services it must obtain a sales tax permit from the controller of public accounts for each place of business within the state. A limited sales tax permit will not be issued until the applicant provides the controller with a bond or other security.

3. Depending on the type of business or activity that the corporation may be engaged in, it may be subject to certain state licensing requirements or be required to pay certain fees or occupational taxes.

4. We have applied to the Internal Revenue Service for an employer identification number on the required Internal Revenue Service form.

5. Funds collected by the corporation for FICA (social security) and withholding taxes must be paid according to the provisions under the Internal Revenue Code, or the persons who are responsible for the withholding and deposits will be held personally liable for nonpayment of the same. This liability is separate and distinct from the liability imposed upon the employer-corporation.

6. The State imposes a franchise tax on corporations for the privilege of doing business in this state. If your corporation fails to pay its annual franchise tax, your corporation will be subject to penalties and interest. Thereafter the corporation can forfeit its charter to do business in the state for said nonpayment.

7. You must obtain an Assumed Name Certificate if your corporation will be known as, or transact business under, any name other than the exact corporate name as stated on the certificate or Articles of Incorporation. The Assumed Name Certificate must be filed with both the secretary of state and the county clerk's office of the county in which the corporation has its registered office as stated in the Articles of Incorporation.

8. Depending upon your tax objectives, you may want to consider electing subchapter S Corporation status with the Internal Revenue Service so that the corporation may be taxed as a passthrough C corporation. The Internal Revenue Service Form must be filed within seventy-five (75) days of the commencement of the business. It is advisable that the subchapter S Election Form be submitted to the Internal Revenue Service by certified mail with return receipt requested.

9. In order to protect your status as a corporation, certain formalities should be observed concerning the compensation and remuneration paid to officers of the corporation. The board of directors should pay to its officers reasonable compensation. The Internal Revenue Service has the power to disallow deductions of the corporation for money paid in excess of what is considered as "reasonable remuneration" paid to employees based on the employee's efforts and contributions to the corporation. Never pay a bonus to an employee who is also a shareholder and/or a director until the bonus is authorized by a resolution of the Board of Directors and reflected in the Minutes. The practice can raise questions concerning personal liability and invite Internal Revenue Service scrutiny. The Internal Revenue Service could argue that the payment was a dividend. Dividends are taxed twice, once to the corporation and once to the person receiving the money. The corporation cannot deduct as a business expense the dividend paid to a shareholder. S Corporations are "flow through" tax entities and therefore the "double taxation" does not apply.

10. The corporation should not begin business until the corporation has received at least $ 1,000 for the issuance of its shares. The $ 1,000 may consist of money, labor or property actually received. I would recommend that prior to execution of the shares of the corporation, the board of directors recite, in a resolution, the fact that said $ 1,000 consideration has been received and in what form it was received, i.e., money, labor, or property assigned to the corporation.

11. You should hold an annual shareholders and directors' meeting as required by law. You should discuss and review the business activities which have transpired during the previous year at the annual meeting. Please contact this firm if you desire our assistance in helping you prepare the requisite corporation resolutions and minutes which should accompany the shareholders and directors' meetings, including the annual meeting.

12. Keep in mind the appropriate business for your corporation. As a general corporation, you may engage in a broad range of businesses. However, as a general corporation, you cannot legally engage in the following businesses: banking, trust company business, building and loan associations, insurance, railroad activities, cemetery business, abstract and title, and other ventures which require a special license. In order to incorporate a professional business, such as a doctor or dentist, you must be incorporated under the correct professional incorporation act.

13. Corporate formalities: You should at all times do business under the corporate name exactly as specified in the Articles of Incorporation and not deviate therefrom unless an appropriate assumed name certificate has been filed. Accordingly, letterhead, invoices and stationery should be ordered to reflect the full, correct corporate name.

14. Whenever a person signs on behalf of or for the corporation, he or she should add his or her title next to the signature so that it will be clear that he or she is acting as an agent of the corporation rather than in his or her individual capacity.For instance, if you sign a contract with just your name and do not state your relationship to the corporation next to your name in the contract, you may be held personally liable for the contract. A correct signature would be:

XYZ Corporation

By:

____________________________

[typed name], Vice President

15. Your bank and checking accounts should also reflect your corporate name. A new bank account should be opened in the name of the corporation. This should be accomplished easily by completing a corporate resolution which authorizes the corporation to open a bank account. Any loans or banking activities should be conducted in the name of the corporation rather than your name individually or you may become personally liable for said obligations. If a loan is made and the lender requires you to endorse or guarantee the loan personally, you should have the above action approved by the board of directors and reflect the approval in an appropriately drafted corporate resolution which is adopted and inserted into the minute book of the corporation. Likewise, all leases, contracts and other arrangements which you have regarding your present equipment, office premises and furniture should be handled in the same fashion. All important corporate transactions should be approved by the board of directors and adopted by the corporation pursuant to a properly prepared corporate resolution which is adopted and inserted into the corporate minute or record book. An example of items which should be approved by the board of directors includes such things as employment contracts, buy-sell agreements, profit sharing and pension plans, trust agreements, loans, leases, major purchases and important decisions which could effect the capital structure or finances of the corporation.

16. Compensation of employees: You should also establish reasonable salaries and/or compensation for all employees and directors of the corporation at meetings of the board of directors, again accompanied by a resolution and inserted into the corporate minute book.

17. Stock certificates: The board of directors should authorize the initial issuance of shares. A corporate resolution should be obtained which states the consideration to be paid for the shares and authorizes the purchase of the stock. Do not issue the shares until the correct and full purchase price has been paid.

18. The corporation and its shareholders may agree to impose restrictions on the shares of stock. If so, a stock agreement should be prepared and approved. The corporate capitalization, number of shares or method in transferring the shares, if different from existing restrictions, should be approved by the board of directors and reflected in the corporate minute book by appropriate resolution.

19. Corporate seal: We have provided you with a corporate seal which is in the corporate minute book. You may be required by third parties to use the corporate seal in executing corporate resolutions, loans and other documents.

20. Directors responsibilities: The directors control the policy of the corporation and delegate the implementation of the policy to the officers. A director may not delegate his or her authority for policy making decisions to the officers. Officers are responsible for payment of salaries, implementation of corporate policy, day-to-day management and operation of the corporation. Officers also are responsible for payment of payroll taxes. Nonpayment may result in personal, civil and/or criminal liability by the officer and the directors of the corporation. If the corporation loans money to any other directors of the corporation, you may be personally liable for the loan if it is not repaid. The directors have the absolute right to inspect all corporate books, records and documents at any time. If the directors do not exercise this right, they may held liable for negligence if the corporation suffers a loss, or its creditors suffer a loss by reason of failure to exercise due diligence in such matters.

21. Removal of officers: Officers may be removed at any time by the board of directors. However, directors may only be removed by the shareholders under the procedures allowed by law which can and do include the holding of a special meeting to vote on the removal of the director.

22. The directors, rather than the officers, have the sole power to declare dividends. Dividends will be paid pursuant to the direction of the board of directors. For issuing shares or declaring dividends you should consult with your accountant to review the tax aspects of paying dividends especially if the recipients of the dividends are employees of the corporation in addition to being shareholders.