A common question from many business clients, especially for start-up businesses, is what kind of business structure should they use. Many people starting their first business have the mistaken belief that a corporation offers different and better protections than a limited liability company, also referred to as an LLC. They tend to think of the LLC as a “corporation-lite,” something lesser, not having quite the “muscle” of a full-blown corporation. Even many experienced business people and ophisticated business owners have the same misunderstanding when it comes to selecting the best legal entity for a new business, or a subsidiary business.
In fact, the best business structure is unique to each individual’s or group’s situation. However, it can generally be said that a limited liability company is often a better option due to its simplicity. Some of the reasons are reduced costs to set up the LLC and the ease of maintaining its legal status. In fact, the only requirement to maintain an LLC is remitting the annual payment to the State Corporation Commission (SCC), which now can easily be done online. By contrast, a corporation is required to maintain a board of directors and a slate of officers, which includes at a minimum a president, secretary and treasurer. Failure to comply with these requirements can have a devastating affect if the “corporate shield” is pierced, that is a court determines that the corporation was nothing but a shame. This can lead to the owners having personal liability that might have otherwise been avoided if claims are made against the corporation.
Like the corporation, an LLC may also have a board and officers, with annual meetings and all the practices of a corporation, but is not required to have them. The LLC is run by its owners or a manager selected by the owners. Being an owner in an LLC is equivalent to being a stockholder in a corporation. The corporation, however, is required to have annual meetings for its stockholders, at which time they will elect new board members. In turn, the board of directors must also hold annual meetings wherein officers are elected for the next term. At each of these meetings, and all other meetings of the stockholders or board, written minutes of the meetings must be maintained by the meeting secretary, who may be a different person from the statutory officer holding the office of corporate secretary. Again, LLCs may do all the things a corporation does, but the point is the LLC is not required to do so.
The corporation is also required by law to file with the SCC an Annual Report. While it’s only a form that is filled out and mailed back to the SCC, it must be done, Or Else! The “Or Else” is that the corporation will be terminated by operation of law for noncompliance. Since the LLC is not required to file an annual report, it cannot be terminated for any reason other than not paying a nominal fee each year. Of course, if the corporation or LLC is terminated, you lose all the protections of having a legal entity conduct your business and thereby expose yourself and your assets to risks that otherwise would be avoided. For many people, protecting personal assets is the primary reason for creating and doing business as a legal entity.
As you can readily see, the LLC choice leads to very few requirements and thus little or no risk of messing up. This is why most attorneys will recommend using an LLC over a corporation. With that said, it is critically important to consult with your CPA or other tax advisor about your particular situation. In some situations, there are tax reasons for preferring a corporation over an LLC, but this seems to be the exception and not the rule.