Over the years, many a client has expressed a desire to form a corporation for their business.
There are good reasons for this.
A corporation is a legal entity, recognized by law as being legally empowered to enter into contracts; have employees; own property such as bank accounts and real estate; and sue and be sued.
It offers a business vehicle whereby multiple parties may own and invest in defined portions of the company through the issuance and purchase of shares of stock.
Its liabilities and obligations are separate and apart from the liabilities of its owners, or shareholders, and thereby provides a shield to limit their personal liability.
It can elect to be taxed as a separate entity, so that income received by the corporation is taxed, and then when the corporation pays its employees their compensation, that payment is taxable as their income again, sometimes referred to as "double taxation."
Or, in many instances, corporations can avoid double taxation by electing that the compensation paid to employees be taxed only as their personal income, with a "subchapter S election," sometimes referred to as "pass thru taxation."
The corporation law, however, brings with it many formal requirements, many of which are geared toward larger entities, not smaller businesses.
These requirements can create unnecessary paperwork, expense, risk of personal liability, and other pratfalls for the small business owner who fails to heed and comply.
For instance, corporations are required to adopt formal written bylaws upon their inception, to hold annual or biannual meetings of their shareholders and officers and directors, to maintain written minutes of these meetings in the company books and records, to file annual or bi-annual reports with the secretary of state (along with a fee), to generate and issue formal stock certificates to their shareholders as evidence of their ownership interest in the company, and a whole host of other detailed requirements.
Many of these requirements may well be very important to the fair and proper management of a larger entity that has numerous owners, or shareholders, but are unnecessary baggage for a smaller business, that serve no real purpose.
Still, if the owner or owners of a small business choose to incorporate under the corporation law, then they are obligated to observe these requirements or risk having their corporate existence revoked; being held personally liable for corporate liabilities; and having problems selling or liquidating corporate interests and assets.
This is why, some 20 years ago, Missouri followed the national trend of the day by adopting the Limited Liability Company (LLC) Act, establishing limited liability companies that, like corporations, are separate legal entities with essentially the same powers, opportunities and rights as corporations, but without many of the formal requirements that are truly unnecessary for a smaller business entity.
For some years after the LLC law was formed, clients would on occasion be hesitant to go along with my advice that they form an LLC, instead of a corporation. However, over the last 20 years, people are used to seeing businesses with the letters LLC beside their names, and the corporation law has taken a back seat to the LLC law for a large segment of the business community.
Like corporations, LLC's may own property, enter into contracts, sue and be sued, have employees, elect double taxation or pass through, and maintain risks and liabilities separate from its owners, or "members", as they are called under the LLC Act.
But with an LLC, there is no requirement of meetings, minutes, annual reports to the secretary of state, annual fees, or stock certificates. These requirements are replaced with an operating agreement that fulfills all of those functions.
The adoption of the LLC law two decades ago truly is an example of the law adapting to better and more efficiently serve the needs of the citizenry, and now, twenty years later, it has proven to do just that for many a business owner.
Ken Garten is a Blue Springs attorney. Email him at firstname.lastname@example.org