Corporation vs. LLC – Corporate Formalities

Worries over corporate governance are a big reason many people choose not to incorporate and instead settle on another entity type. Corporations have gained a reputation for extremely complicated governance with a lot of rules and regulations, so that corporate directors are spending a lot of time and effort maintaining good standing. Limited Liability Companies, on the other hand, are perceived as having few governance requirements, a big part of the growing popularity of the LLC structure.

But corporate governance might not be as big of an obstacle as you initially thought.

Corporate Governance

While there are many different documents that can become part of corporate governance, there are only a handful of essential documents that you need when you’re running a small corporation. This is a big part of the misunderstanding of corporate governance: there are a lot of documents you need if your corporation grows into an international giant, but they are not necessary for a small incorporated business. Here’s what you really need.

First, you will need a certificate of incorporation, also known as articles of incorporation. This document includes basic details about your business, such as:

• Business Address
• Business Name
• Registered Agent
• Stock Information 

Visit your Secretary of State’s website or the Department of Corporations and you might find a simple template for this form. Small business owners looking to incorporate should be fine with the standard requirements, but if you want to spell out special provisions at this stage, you can do so.

The next step in corporate governance is an initial meeting. This is where you will elect corporate officers, as well as decide on corporate bylaws. The bylaws are the rules you use to formalize how the corporation runs: what do the corporate officers do, what procedures do you follow to call meetings, and how will you issue and transfer stock. While you can set your own rules, you should be able to find templates from your state that will suit your needs.

After that, a corporation must hold an annual meeting for directors, as well as an annual meeting for shareholders. These have different functions: the directors will typically focus on plans for the business and making decisions on the future of the business; the shareholder meeting (which must be announced in advance—check with your state for specific rules for notification) is an update on the business, its previous, ongoing, and future activities, and an opportunity to elect new directors.

These meetings are accompanied by some additional paperwork requirements. You will need to have someone taking minutes of the meetings, noting substantial items such as:

• Time and Place of the Meeting
• Attendance
• Agenda Items
• Votes 

And every year, a corporation will have to file a report updating or confirming the information from the certificate of incorporation accompanied by an annual fee.

Limited Liability Company Governance

Governance for a limited liability company is famously simple. There is only one document that you really need to have, the certificate of organization. If you choose to form an LLC, you’ll file this with the state and include basic information about the company:

• Business Name
• Business Address
• Registered Agent
• Purpose for Formation
• Managed by one person or multiple people 

Once that is on file, the LLC just has to file an annual report with the same information.

One additional component of LLC governance is not required, but it’s a good idea to do it, and that’s developing an operating agreement. The operating agreement functions similarly to corporate bylaws, except for an LLC. It spells out how the organization will be run: what the managing members do, procedures for calling meetings, and, importantly, the conditions under which the LLC might be dissolved, among other things. The operating agreement is the opportunity for you to set up your own governance standards above and beyond the legal requirements.

Comparison

Limited Liability Companies have a reputation for easier governance than a corporation, and depending on the business, it might well be the case. However, the requirements for a small corporation can be very simple, too. The biggest difference is holding annual meetings and filings, which only impact you once a year. But the LLC is always an option if you want to avoid the corporate governance requirements. Above all, you should be comfortable with how the business is structured, so consider the operating agreement for an LLC or corporate bylaws that align with how you plan to govern your business.

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Tom McDonough