I have found a serious misconception in some of the advice floating online about choosing between an LLC and an S-Corporation for a new company. Many online resources incorrectly state that LLCs are a better choice because they require little or no corporate paperwork during the life of the company.
I do not know how this misconception started, but as I have covered in a previous post, ignoring corporate “formalities” can lead to serious consequences for a company and its owners, particularly when someone attempts to pierce the corporate veil and hold the owners personally liable for a liability of the company.
The board and members of an LLC should document all important decisions, including loans, issuance of membership interests, major capital purchases, leases, and the election and removal of managers/officers and board members. Even though an annual member meeting is not required by the Minnesota Limited Liability Company Act (see Minn. Stat. §322B.333 sub. 1), I advise my LLC clients to hold an annual member meeting and document several actions, even if the business is routine, such as renominating and electing the board.
If an LLC hopes to bring in outside investors in the future, those investors will certainly conduct due diligence on the company. One item that is invariably included on due diligence request lists is a copy of all corporate minutes and resolutions. Potential investors may become wary of a company with sloppy or incomplete documentation. At best, the company will need to spend significant time playing catch-up on its governance documents.
An experienced corporate attorney can assist companies with implementing best practices for corporate governance documentation and advise companies that have not followed best practices on options to correct their situation.
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