Revisiting corporate land

In my last column, I talked about the various options available for starting up a new business entity. I focused primarily on the tax consequences of choosing either an S-corporation, a C-corporation, a limited liability company (LLC) or a general partnership. I am quite certain you still have the details of that fine article fixed firmly in mind.

I had a discussion with Clay Geitman earlier this week. Clay is a lawyer with Bonnella & Sullivan, a law firm in town specializing in estate planning. Clay suggested following up on the earlier article, and he was kind enough to provide the technical outlines for this piece. So consider this a collaborative effort, but remember, if anything strikes you as either brilliant or funny, I did it.

Why create a separate business entity? To limit personal liability, of course. To maximize tax savings. To provide for continuity of the business in the event of a change of ownership. And various other reasons.

How do you select the right business entity?  The most important first step is to talk nicely to your lawyer and your CPA. Together they can help you decide on the most appropriate form of business, and then help you work through the steps necessary to breathe life into it.

What are those first steps? Let’s say that the decision is made to incorporate your business. The lawyer prepares a series of documents, including articles of incorporation, bylaws, minutes of the organizational meeting of directors and buy-sell agreement between the shareholders. Once the articles of organization are filed with the Wyoming secretary of state in Cheyenne, your company is officially on the way to making you filthy rich. (If you select the LLC format, the process is remarkably similar. A corporation has shareholders; an LLC has members. Wyoming law now permits single-person corporations and LLCs.)

The CPA will obtain an employer identification number for the business, which is the corporate equivalent of a social security number. The CPA will also apply for Subchapter S corporate status, if deemed appropriate, which allows the profits and losses of the business to be passed directly through to the shareholders and reported on their individual federal tax return. The CPA will also advise and assist in setting up the corporate accounting systems.

I am so mechanically dyslexic that I have to hire someone to change the light bulbs for me. However, for those of you who are confident self-starters, I understand that there is available on the Internet all of the information necessary to allow you to create and implement a corporation or LLC on your own, without a lawyer or CPA. My very own personal opinion about traveling down that road is that you get what you pay for. I have had the opportunity to repair a corporation or two which started life in this manner. It is like trying to turn the Elephant Man into Harrison Ford.

The bylaws of the corporation or the operating agreement in the case of an LLC is the instructional manual for the company. It establishes the number of directors, defines the responsibilities of the various corporate officers, sets the agenda for the annual or special meetings of the board of directors and the meetings of the shareholders.

The bylaws, in conjunction with the buy-sell agreement and the minutes of the organizational meeting of the company, will also establish the rights and responsibilities of the shareholders, their initial capital contributions, the process for future capital contributions if necessary, division of the profits and losses (which is usually pro rata based upon the dollars invested), the manner of resolving disputes among the shareholders and the method for winding up the affairs of the business in the event that it didn’t do so good or the shareholders simply want a divorce from one another.

Once the articles of incorporation are filed with the secretary of state, the board of directors holds its first meeting — the organizational meeting. At that meeting the board will elect the officers of the company for the year, designate the bank to be used by company, formally approve the issuance of shares to the stockholders, approve reimbursement of pre-incorporation or startup costs (such as legal and accounting fees, and filing fees) and adopt whatever other corporate resolutions are appropriate for the business.

Things to remember after the business entity is created:

  • Keep the business, and its finances, separate from your personal stuff. Don’t be writing corporate checks to take the boyfriend out to dinner. (Let him pay. It will give him great pleasure).
  • Keep detailed records of business activities.
  • Hold an annual meeting for the shareholders, which is generally followed by the annual meeting of the board of directors.
  • Maintain corporate documents, such as payroll records, bank records, and tax returns, in orderly fashion.
  • Schedule periodic check-ups with your lawyer and CPA. If you are under age 50, then once a year should suffice. For those over age 50, I suggest weekly visits because it’s so darn hard to remember things after that point.

So what is the sticker price for this stuff? For a non-complex corporation or LLC, expect to pay between $500 and $1,000 to the lawyer, $100 or more to the secretary of state for a filing fee (in the case of an LLC the filing fee may be obscenely expensive depending upon the initial capitalization of the company), and $100 for a fake leather corporate records book which holds the stock certificates, corporate seal and official corporate records, such as the minutes, bylaws and banking resolutions.

Before you go off half-cocked things that these costs are outrageous and a violation of all your constitutional rights, just remember that lawyers are people too, or at least some of us are, and anyway, these expenses are tax deductible.