Here’s my number #1 choice for most small businesses. I now regularly recommend they form an LLC that makes the S corporation tax election. But that wasn’t always the case. Read on and I’ll explain why.

In the past, I’ve been partial to S corporations and have operated my own law practice for many years as an S corporation. S corporations provide good liability protection and may provide significant tax savings with respect to the 15.3% FICA or Self Employment Tax if set up properly.

S corporations provide the same liability protection as regular corporations which have a long legal history in the courts with respect to liability and tax issues. This provides good predictability of the outcome when you go to court or fight with the IRS.

I still believe S corporations are a good entity choice for small businesses. So why do I now routinely recommend they form an LLC that makes the S corporation election?

Let me explain. LLC’s provide the same or similar liability protection as do corporations. LLC’s have now been around long enough that they are starting to have more predictability with legal and tax issues. If you form an LLC that makes the S corporation election, you can also save on the FICA taxes just like an S corporation. LLC’s tend to be more flexible and easier to operate than corporations. Depending on state law, it may be harder for creditors to get to the ownership interest of an LLC than it is to get to stock ownership in a corporation.

Having said all of that, you don’t go wrong with either an S corporation or an LLC, but my choice is to form an LLC.

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The comprehensive plan goes beyond basic legal services, to offer more complex and comprehensive coverage for a premium in cost. Generally, all the benefits of an access plan are provided at no cost to you, plus a broader range of services like drafting complicated legal documents, negotiations with adverse parties, legal representation in court cases such as divorce and child custody. They also cover all the costs involved in a legal litigation. Comprehensive plans typically start at around $300 per year and are most beneficial to middle-class families.

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Steps to Hold An Annual Meeting:

1. Schedule Meeting and Send Notice. Like all
corporate meetings, the annual meeting requires notice to all
shareholders (if a shareholders meeting) and notice to all
directors (if a directors meeting). The notice should include
specifics as to date, time and location of the meeting. The notice
should also state or describe the items or business to be discussed
and voted on at the meeting although it is assumed that voting for
directors will take place.

2. Conduct the Annual Shareholder’s Meeting.
There is no required procedure in corporate law for conducting a
meeting of shareholders. The procedure used is up to the directors
and/or shareholders of the corporation. Some (mostly larger
corporations) use a formal procedure utilizing Robert’s Rules of
Order requiring motions, seconds, discussion, and then a vote. Most
smaller corporations use less formal procedures consisting of a
simple discussion on issues and then a vote. The vote can be a
voice vote or in writing. There should be a count of the vote taken
by a corporate officer, usually the corporate secretary. An agenda
of business to be conducted at the meeting is advisable but not
required.

Special Note About Quorum Requirements: A “
quorum” refers to the number of members of a body or group required
to be present in order to transact the business of the body or
group. Quorum requirements for a shareholder’s meeting are most
often set forth in the corporation’s bylaws. The presence in person
or by proxy of the holders of a majority of the shares entitled to
vote on a matter at a meeting is the typical or most common quorum
requirement. If the number of people required to make up a quorum
is not met at the meeting, or present by proxy, any resolutions
passed would not be valid and could be challenged.

3. Prepare Minutes of Meeting. A corporate
officer or person assigned by the corporate officer, needs to keep
minutes of the meeting. This is usually done by the corporate
secretary but can be someone else. Minutes are simply a written
record of the proceedings of the meeting. There is no legal
requirement as to the form for minutes or how detailed minutes have
to be. However, they should be detailed enough for someone reading
the minutes to understand what corporate business was conducted at
the meeting and what resolutions were passed or failed. They should
also indicate whether a notice was given for the meeting, who was
in attendance at the meeting, and who voted on various resolutions
brought before the meeting. It is also advisable, but not required,
to indicate reasons for the shareholders taking certain action.

That’s where a properly drafted Buy-Sell Agreement or Shareholder’s Agreement can help. These agreements can require that in the event of death, the shares of a deceased shareholder will be purchased by the corporation itself or by the remaining shareholders. The agreements usually set out a procedure for the buy out and a method for valuing the shares of the deceased shareholder. In this way, the deceased shareholder’s heirs get paid for the stock but are not involved in the ongoing operation of the corporation.

The corporate organization needs to be completed and
observed. In a nutshell, this means filing articles of incorporation, holding an organizational meeting or preparing a consent in lieu that
provides for adoption of bylaws, appointment of directors
and officers and authorizing the issuance of shares of stock.

Issue shares to the shareholders. Issuance of shares of stock is often done at the organizational meeting although it can be done at other
times as well. If no shares are issued, a question arises as to
who owns the corporation and who is entitled to vote. A
corporation cannot be properly organized without
shareholders.

Hold shareholder and director meetings. There is no legal requirement that meetings be
held in a certain manner. They can be formal or informal.
Corporate law does provide that shareholders and
directors should hold meetings to conduct corporate
business which is outside the ordinary day-to-day operation
of the business. In lieu or instead of holding meetings, the
law allows each of the participants to agree in writing to the
corporate action being taken by signing a Consent in Lieu of
Corporate Meeting.

Corporate law does not dictate how
many meetings should be held or how often meetings
should be held. That is up to the directors of the
corporation and is based upon the business needs of the
company. Having minutes of meetings or consents in lieu of
meetings in your corporate records is a good indication that
you have been operating like a corporation. However, the
absence of minutes or consents is an indication you have not
been operating like a corporation.

Treat corporate property as separate from the individual
shareholders. Property owned by the corporation should
not be used for the personal benefit of individual
shareholders unless there is a valid business reason for
doing so. Authorization for a shareholder to use corporate
property should be set out in minutes or as a written
consent from the board of directors. A shareholder may
need to reimburse the corporation for the use of certain
property.

Do not co-mingle corporate and personal funds. Since a
corporation is a separate legal entity, a new corporate
checking account should be established as soon as the
corporation is formed. Corporate funds and the
shareholder’s personal funds should not be commingled.

The corporation should also maintain a set of corporate
books or financial records that are separate and apart from
the shareholder’s individual finances. The shareholders
should not pay personal expenses with corporate funds
and/or checks. However, a shareholder can receive
payment in the form of a salary, bonus, commission, etc.,
and can be reimbursed for business expenses so long as the
proper accounting is made.

Sign corporate documents properly. The proper signing of
corporate documents is important so that a question is not
created as to whether the individual or corporation is legally
bound. The important thing is that it is obvious that the
person signing is doing so for or on behalf of the
corporation and not for themselves individually.

Make certain that your customers and creditors are
aware that you are operating as a corporation. You
should notify, to the extent reasonably possible, all of
your customers and creditors that you are now
operating your business in the corporate form. This can
be done by putting the corporate name on your
letterheads, envelopes, business forms, business cards,
and business checks. You should make certain that
advertisements, signs, brochures, etc., contain the proper
corporate designation at the end such as Inc., Co., or
Corp. If you have followed these steps, you should be entitled to the
limited liability protection. If you have not, the judge may pierce the
veil and find the shareholders individually liable for the corporation’s
debts.

There are many legal cases where the courts have honored and
preserved the “corporate veil” thus maintaining the limited liability
protection for the shareholders. This is the rule in most cases.
However, there are other situations where the courts have “pierced
the corporate veil” and found the shareholders personally liable for
the debts of the corporation. If a lawsuit is filed against a
corporation and its owners/shareholders, then a judge must decide
if the owners of the corporation have organized and operated the
corporation in a way so as to create and maintain the separation
between the shareholders and the corporation.

The law provides that if the shareholders of a corporation operate
like a corporation by following corporate formalities, then they will
be afforded limited liability protection. If they do not operate like a
corporation, they could lose the protection.

I regularly recommend someone form an LLC that makes the S corporation tax election. S corporations provide the same liability protection as regular corporations which have a long legal history in the courts with respect to liability and tax issues. This provides good predictability of the outcome when you go to court or fight with the IRS.

I still believe S corporations are a good entity choice for small businesses. So why do I now routinely recommend they form an LLC that makes the S corporation election?

Let me explain. LLC’s provide the same or similar liability protection as do corporations. LLC’s have now been around long enough that they are starting to have more predictability with legal and tax issues. If you form an LLC that makes the S corporation election, you can also save on the FICA taxes just like an S corporation. LLC’s tend to be more flexible and easier to operate than corporations. Depending on state law, it may be harder for creditors to get to the ownership interest of an LLC than it is to get to stock ownership in a corporation.

Special Note: While officers, directors, or shareholders, are generally not liable for their acts while working for the corporation, they can, however, be personally liable for harm caused to another person if the damage was caused by their negligence or by an intentional act.

The law also allows you to operate a business in one of several different forms or entities such as a corporation or limited liability company (LLC), etc. If the business is operated as a separate legal entity, then the business is considered separate and apart from its owners. Therefore, if the business is sued, only the business assets can be taken to satisfy or pay a judgment. Your personal assets are protected. This is called limited liability protection. This protection is valuable and a good reason to do business as an entity. However, the protection is not absolute or 100% guaranteed, but is conditioned on the proper organization and operation of the corporation.

When a lawyer sues a business entity, he or she will usually sue both the entity and the owners individually. This is because lawyers know the entity often does not have sufficient assets to satisfy or pay the claim. However, the law requires the person suing to prove that the entity, the corporation or LLC, was not properly organized and operated as a separate legal entity. The legal terminology is called “piercing the veil.” If the court allows “piercing the veil” then a judgment can be obtained against the entity and the individual owners. However, if the court determines that the party suing has not proven their case, then the limited liability protection applies. The person suing might still be entitled to a judgment against the entity but not against the individual owners and their personal assets.

The key is to organize and operate your entity, corporation or LLC, properly so that you have a strong argument, if you are ever sued, so that you are entitled to the limited liability protection. Organizing and operating the entity properly is not difficult, but there are certain steps or procedures that should be taken to help insure your protection.

The value of the consideration, other than cash money, is a question reserved for the
directors of the corporation. In other words, the directors have the
right and authority to determine the value of equipment, services, or
other property given to the corporation in exchange for its stock.
The exchange of stock for some form of consideration, involves a
basic negotiation between the person desiring to purchase the stock
and the directors of the corporation. They must come to some
agreement on what the value of the property or services is and how
many shares of stock will be given in exchange.