So you want to start a new business and your accountant tells you to have an attorney form an LLC or Corporation. If there is no tax difference between the two, how do you know which one is better for your business?
Your attorney will probably guide you on which one provides better liability protection. But here is what you need to know as the business owner:
- The owners are shareholders and receive stock certificates. The shareholders elect the board of directors annually.
- The board of directors sets the general direction of the corporation and votes on major decisions, but does not engage in day-to-day management. It also elects/fires the officers on an as-needed basis.
- In California, if a corporation has one shareholder, there only needs to be one director (but there can be more). If a corporation has two shareholders, there needs to be at least two directors (but again, there can be more). If a corporation has three or more shareholders, there needs to be at least three directors (but there can be more). (California Corporations Code Section 212.)
- The officers run the business on a day-to-day basis.
- In California, three officers are required: President, corporate Secretary and CFO/Treasurer. Other officer positions – CEO, Vice President, etc. – are optional. One person can fill all three (or two of the three) required positions, but banks often require that different fill the President and Secretary positions unless there is only a single shareholder.
- California corporations must hold one shareholders meeting annually and it is strongly recommended that they hold at least one board of directors meeting annually (actually, the resolutions simply can be signed by all directors) and whenever a major decision needs to be made.
- With a corporation, each owner has the same percentage of ownership, voting power and, if the corporation is a Subchapter S, profits and losses.
Limited Liability Companies (LLC’s)
- LLC’s generally do not have shareholders, directors or officers. (Although an LLC can be organized to have these, it’s rare.)
- The owners of an LLC are members and frequently have membership “units”.
- LLC’s can have one of two management structures: member-managed – where each member takes an active role in running the business and can sign contracts (like a general partnership) — and manager-managed – where one or more managers operate the business and sign contracts (like a limited partnership). In any case, no meetings of the managers or members are required to be held.
- Often the operating agreement requires that extremely major decisions (such as sale or dissolution of the LLC) be made by a majority or super-majority (more than 50%) of the ownership interests.
With an LLC, an owner can have different percentages of ownership (meaning the percentage of proceeds if the LLC is sold), voting power and profits and losses. For example, an LLC owner can have 25% of the ownership (meaning 25% of the proceeds if the LLC is sold), 10% of the voting power and 5% of the profits and losses