The following article is on the importance of the protections of the corporate and limited liability company (LLC) statutes. Our law firm assists many area businesses with their entity formation and other business law concerns.
The first corporations in America were formed in the late 18th century just after the American Revolution. As our nation grew and economy evolved, so did the structure of corporations and their treatment under the law. Early on the corporate charter was sought after as a more favorable way to raise capital. Now the laws governing corporate and LLC entities address shareholder/member rights, corporate governance, limitations on liability, tax treatment, accountability to the public, and more.
Our modern statutes governing business structures are complex. They allow the formation of many types of entities including corporations, partnerships, limited liability companies, non-profit corporations, and recently public benefit corporations. These statutes are designed to promote business, economic activity, and risk – taking. All essential to our free market economy. At a fundamental level, these statutes provide protection to those involved in the business activities of the entity and also protection to members of the public. Whether you are operating a small business in northern Minnesota, serving on the board of a community non-profit, or acting as an officer of a multi-national corporation, these laws apply to you.
What’s important to know is that the benefits of these modern corporate statutes are available to businesses large and small. If you conduct your business as an individual or a simple partnership, all of your assets, both business and personal, are exposed to liabilities and claims that may arise during the course of doing business. My wise University of Minnesota law professor, John Matheson, called this ‘Come get your house liability’. There’s nothing wrong or illegal about conducting business this way, it just creates much more risk to you. Insurance helps, of course, but putting in place a corporate entity provides more protection.
What are your options?
Form a corporation – Corporations provide a liability shield to owners (shareholders) and those running the corporation (directors and officers), and they have a more formal governance structure (board). Corporations are taxed at the entity level, so corporate profits and dividends are both taxed unless an S-corporation (S-corps) status is elected. S-corps offer ‘pass-through’ taxation but are limited to 100 shareholders who must be individuals and cannot be corporations, partnerships, or foreign persons. S-corps must still file a separate corporate tax return.
Form an LLC – An LLC also provides a liability shield to owners (members) and those running the company (managers). The newly adopted Minnesota Revised Uniform Limited Liability Company Act has a long name but actually provides a great deal of flexibility and less formality in the structuring of an LLC as compared to a corporation. Tax treatment is pass-through without any special election, and an LLC may have an unlimited number of members. The members may be individuals, corporations, LLCs, partnership, trust, or other legal entities. The LLC entity can be a good option for ventures among family members, ones involving shared ownership of property, or part-time businesses, and it’s sophisticated enough for more complex business arrangements such as a joint venture between two large corporations.
A not-for-profit venture may form a corporation or an LLC under Minnesota statutes, and the new Minnesota Public Benefit Corporation Act allows this type of corporation to pursue a stated ‘public benefit’ along with maximizing shareholder returns, such as a social or environmental concern.
Lastly, it’s important to highlight a misconception that some individuals have who operate a small business. A Certificate of Assumed Name does not create a separate entity and does not provide liability protection. A Certificate of Assumed Name lets the public know that you are doing business in a name other than your own full name, such as Jane’s Plumbing, but it does not provide liability protection for you. If you’re conducting business in your own name or an assumed name, it would be better to consider forming a corporation or LLC. Please give us a call to talk it over.
Any requests for topic suggestions may be sent to firstname.lastname@example.org. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.