Business Law LLCs

Doing Business As a Corporation? You’re Living in the Past

Corporation vs. LLC

Corporation vs. LLC

So, your family business has been a corporation forever. All these years you’ve been dutifully filing your annual report with the Missouri Secretary of State’s office along with your annual fee; and filing the mandatory annual franchise tax return (even though you don’t owe any such tax). You know about “corporate formalities” and you’ve been putting some boilerplate shareholders and directors meeting minutes in your corporate minute book each year (even though you’ve rarely had a formal meeting). Or maybe you pay the big bucks annual retainers to your CPA and attorney for all of the above.

If you were operating as an limited liability company, none of the above would be necessary. None of those “corporate formalities,” public reports, fees, and retainers are necessary in an LLC. Imagine never having to file a franchise tax return or an annual report with everyone’s name and address. Imagine not having to worry about those fictional meeting minutes (and the attorney fees). Most importantly, an LLC provides more creditor protection to you and your co-owners. Yes, I said more protection from your personal creditors.

Understanding LLC Creditor Protection

Let’s assume that you own 51% of your corporation’s voting stock. Let’s further assume that while taking the kids home from school (unrelated to the business) you negligently run over and kill a brain surgeon. This is followed by a successful lawsuit against you for $10 Million; immediately followed by the surgeon’s estate levy on (i.e., taking possession of) your stock in the corporation. As the new controlling stockholder the surgeon’s estate elects a new board of directors who then take action to sell the company for cash, which is discounted for quick sale. You not only lose your company, but your job as the chief executive i.e., your salary. All of your other stockholders are equally out in the cold.

What if you were doing business as a limited liability company? Lawsuit, no change. Collection … completely different. The surgeon’s estate would be entitled to a “charging order” against your economic interest only. Understand that in an LLC, your economic interest (i.e., profits) is separate from your governance interest (i.e., voting and management rights). So, when the charging order takes your economic interest, it does not remove your voting and management rights. Result: (1) there is no forced sale of the company, (2) you continue as the chief executive, with your salary, and (3) all of your other owners, officers, and employees remain in place.

Think About Converting

There may have been very legitimate reasons for choosing to incorporate way back when. But the rules and options have changed; and in most cases, there is no justification for keeping that corporation (other than your attorney protecting his/her retainer).

Forming or converting your existing corporation to an LLC should have no impact on your income tax status; and better yet, it’s inexpensive. Caution: there are many attorneys who can’t grow out of the corporation way of life and do not follow the new LLC world. Caveat: don’t try to do this yourself. Professional help is critical (but find an attorney who “gets it”).

    3 Responses

  1. So if I understand correctly, the allocation of profits/losses do not have to stay the same within the LLC like they do in the S Corp. However, if the LLC elects to be taxed as an S corp, do they still have the flexibility of changing the allocations during the year? Does that fall under the LLC rules of the state? Then on the K-1’s of the return, the profit/loss %’s could change from year to year. Is that correct?

  2. I have a question regarding LLC limits. I am registered with NV as an LLC and just filed with the IRS to be taxed as an S-Corp. Does this mean the S-Corp allowances apply in regards to shareholders having an independent life separate from the business or are we still under the legal structure of the LLC? More specifically, if a member/owner leaves the company (or gets bought out) does the company have to be dissolved or can it continue to operate relatively unchanged? Thanks in advance!! 🙂

    1. Elishia: Matters concerning the LLC structure, including whether the company is dissolved when a member withdraws, are controlled by the state’s LLC statute.

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