Many times I have been contacted by people wanting to form corporations.
The corporation law has been evolving for more than a century, and there are a number of benefits to forming an entity for business purposes.
Corporations are recognized by the law as entities empowered and entitled to own real estate and personal property, contract, sue and be sued, and employ individuals.
This separateness shields the corporation’s shareholders, officers, and directors from the corporation’s liabilities.
Plus, there can be tax benefits to forming a corporation, if managed correctly.
Corporations are formed under the law of Missouri and most states by filing Articles of Incorporation, along with a fee, with the Secretary of State’s office. Articles of Incorporation contain basic information required by statute, and there is actually a form issued by the Secretary of State’s office that can be used to provide it.
Corporations are subject to a number of statutory requirements thereafter: promulgating by-laws that govern how the corporation is to function, annual meetings of the shareholders and the officers and director, annual elections, issuance of stock certificates to evidence ownership interests in the company, written minutes of the meetings of officers and directors, maintaining a minute book wherein the bylaws and minutes of the annual and special meetings are to be maintained, annual reports filed with the secretary of state’s office, and annual filing fees to be submitted with same.
The purpose of these requirements is to protect interests of the shareholders, and provide for the orderly administration of the corporation’s business.
With corporations, even mom and pop businesses are subject to most of the same requirements as the major corporations, even though many of these formal procedures and processes are largely unnecessary for a small business, and many small businesses fail to properly take care of them.
Accordingly, about a quarter of a century ago, a number of states, in recognition of the fact that many of the formalities and processes of the corporation law represented unnecessary pitfalls for the small business owner, developed the limited liability company, or LLC.
As the name implies, like a corporation, the liabilities of LLC’s are separate from those of its principals and owners, and limited liability companies are empowered to do everything corporations are: own real estate and personal property, contract, sue and be sued, and everything else an entity can do in the eyes of the law.
However, LLC’s are not required to have by-laws, hold annual meetings, elect officers and directors, keep minutes, issue stock certificates, file annual reports, and pay annual fees.
Instead, LLC’s have an operating agreement, that is usually less formal than by-laws of a corporation; have members, who are the owners of the company; and may, pick and choose and adopt those formalities required by the corporation law of corporations that its members may want to use, but certainly don’t have to.
The LLC is cheaper to form and maintain, is less complicated, and provides fewer requirements that its principals can mishandle than a corporation, but it still provides all of the advantages for small business owners.
So whenever I hear someone say they want to incorporate their business, the first thing I do is suggest that they consider an LLC instead.
-- Ken Garten is a Blue Springs attorney. Email him at firstname.lastname@example.org