Hello, your Harvard lawyer, Don Petersen here.
You own a small business, and you’re ready to take the next step – you want to create an “official” entity for your business. What form of entity should you choose?
I’m going to use this blog/vlog to clear up 8 popular misconceptions that you hear about the various forms of entities. Each can lead to you making unwise decisions.
First, see my blog/vlog where I clear-up some confusing lingo. It will make this much easier.
On to the myths.
Myth #1: Corporations are the only type of entity that can be publicly traded.
Reality #1: Not true. LLCs, Limited Partnerships, and other entities can be publicly traded.
Myth #2: Corporate shareholders and LLC members may sell their interests without having to get the other owners to consent.
Reality #2: It’s true that corporate shareholders LLC members can freely sell their interests—unless the bylaws or some agreement between the owners stops them. If you organize the corporation, you decide whether this is true.
With an LLC, though, it is reversed. LLC members need consent from the other members before selling their interest. Unless their operating agreement provides that they don’t have to. Again, if you are organizing the entity, you can decide what terms are in the operating agreement.
Myth #3: Only human beings (not entities) can be corporate directors or LLC managers.
Reality #3: It’s true that only human beings can be corporate directors. But business entities, like other LLCs or corporations, can be an LLC’s manager.
Myth #4: LLCs are “pass-through” entities for income-tax purposes. A corporation is not.
Reality #4: This is kinda true. Bu, you make your corporation a pass-through entity. Make the required election for it to qualify as an S-corporation. And, abracadabra, it also can be a pass-through entity.
Myth #5: A Michigan statute requires corporations and LLCs to hold organizational meetings after they’re created to complete organizing the corporation or LLC.
Reality #5: Partially true. Corporations must hold an organizational meeting, but not LLCs.
Myth #6: The doctrine of “piercing the veil” – under which a court holds you personally liable for your entity’s debts – applies to only corporations, but not to LLCs.
Reality #6: False. If an LLC’s members have not followed certain guidelines when conducting business, courts will pierce an LLC’s veil and hold its members personally liable.
Myth #7: A limited liability company is always the best choice for a small business
Reality #7: False. The best choice for your business depends on many factors. For example (i) the type of management and control that you prefer, (ii) how you intend to fund your company, and (iii) the resulting tax consequences.
If you have any questions about what entity structure is best for you, call Don Petersen, your Harvard lawyer, at 616.389.4960 or email him at [email protected]. He has taught this, and he has many years of experience counseling clients.
