Do LLC’s Have “Corporate Formalities”?

You just formed a new LLC and your attorney says, “We recommend an annual retainer; and for this retainer we serve as your registered agent and assure that you meet the necessary ‘company formalities.'” Before you write that check allow us to give you a little education on this often misunderstood subject.

Why can’t you be the registered agent? Why would you pay an attorney to be your registered agent? Well, the law firm proposal often goes like this: “If you ever get sued, the sheriff will serve us [the law firm] and not you … which will save you from being embarrassed by a sheriff’s visit.”

First of all, your not so friendly plaintiff has no legal obligation to serve the registered agent, that is, the law firm. The plaintiff may always serve you at your office regardless of who is the registered agent. Secondly, are you expecting so many lawsuits that you need a separate agent for service? Fearing that the sheriff will be a regular visitor? If so, maybe you have a deeper problem than the selection of your registered agent. Answer: there is absolutely no reason why you (an owner) can’t serve as your company’s registered agent.

What about those “company formalities”? Corporations, by law, must meet certain “corporate formalities.” For example, corporate shareholders and directors are required to hold a formal meeting at least annually. “Formal” means with prior written notice and written minutes of actions taken at the meeting.

In addition, many actions of the shareholders or board of directors throughout the year require formal meetings or recorded documentation of decisions. An empty minute book may equal loss of limited liability (i.e., the owners become personally liable for the corporation’s liabilities).

But what about “formalities” for LLC’s? Missouri LLC’s have no such requirements imposed by law. Members (i.e., owners) and managers may act informally, that is, without formal meetings and without documentation. So, if you don’t need to hold meetings or document your decisions why would you pay a law firm retainer for advice on “formalities”? Answer: You shouldn’t.

Helpful hint: your operating agreement should make it clear that decisions by members and/or managers may be made informally and that neither formal meetings nor documentation of ordinary-course decisions are required. Consider requiring formal meetings (and documenting the decisions) for certain actions, such as: amending your operating agreement, borrowing money, tax decisions (e.g., S Corporation election or §754 election), encumbering property, sale of assets, or admitting a new member. But mandatory regular or annual meetings should be avoided. Talk with your attorney about what actions he/she recommends for formal consideration and documentation.