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Legal Tip of the Day- Inc. or LLC?

 In America

TALK LEGAL TO ME- JUST THE TIPS OF LAW:

Talk Legal to Me is here to provide you with “Just the Tips of the Law.”  Today’s legal tip is deciding whether to form an Inc. or an LLC?

People tend to incorporate for the limited liability that comes with an entity.  The limited liability granted to owners of corporations is premised on the concept that the debts of the corporation are separate from the debts of the owners because the corporation is a separate legal person.  That limited liability for corporations, historically, brings many attributes that are not widely admired-  for instance the “double taxation.”  This occurs because the corporation, on the one hand, and the shareholders, on the other hand, are separate legal persons.  The corporation’s earnings are taxed as income to that person (the corporation) and then when the corporation distributes dividends to its shareholders, those persons pay income tax on what they receive.  Congress enacted the Subchapter S or I.R.C. in 1958 to address this “double taxation” issue for small businesses.  Some states went even further and created the limited liability company providing for more flexible management while maintaining limited liability.  To date, the new tax bill provides for lower income tax caps to provide additional incentives to incorporate the Inc.  So how do you choose between an Inc. or an LLC?  The management and governance requirements should be a consideration.

The LLC provides owners with much more flexibility in the governance of the business, however, some formalities are still necessary even if they are not required to maintain the limited liability protection. Here are some of the requirements in management structures and corporate governance of an Inc. versus an LLC:

Inc. (Corporation):

  • Required by statute to have a Board of Directors (“BOD”);
  • Directors are required to elect Officers (number and type of officers are set by statute);
  • Upon formation, the Directors named in the Articles of Incorporation must hold an organizational meeting wherein they elect the Officers and adopt the Corporate Bylaws;
  • Shareholders are responsible to ensure that the BOD is properly elected and installed;
  • There must be annual Shareholder meetings wherein BOD is elected and at these meetings there must a quorum to vote either in person or by proxy depending on the language of the corporate bylaws and by statute;
  • Proper notices must be given to all Shareholders of any Shareholder or BOD meeting;
  • Any decisions and resolutions made by the BOD or Shareholders must be properly documented in the corporate minutes;
  • Meeting minutes must be maintained and filed with the corporate documents;
  • The Bylaws must be amended with any substantial and necessary changes;
  • Restrictions exist on number of owners and who can be an owner of a corporation;
  • Corporations issue stock certificates to evidence the type and number of shares owned by each Shareholder;
  • A Shareholder is not an agent of the corporation and cannot bind the corporation;
  • Shareholders receive distributions (dividends) in proportion to their stock ownership and this cannot be changed by agreement.

LLC:

  • May choose to have an operating agreement (highly recommended and some states require it);
  • LLC’s do not issue ownership or membership certificates (but they may);
  • There are few restrictions on who can be an LLC owner or how many owners (members) the LLC can have unless elected to be treated as an S-Corp (fewer than 100 and only one class of membership);
  • The acts of each LLC member, unless set forth in the operating agreement, binds the LLC;
  • LLC members may agree to share profits and losses and make distributions in amounts different from the proportion of their membership interests or their respective capital contributions.

If you need help deciding whether to form an Inc. or an LLC then give Burdick Law a call today at 702-481-9207 or email us at nburdick@burdicklawnv.com.

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