February 1, 2008
When starting a new business or entering into a real estate investment, one of the first and most important considerations should be a choice of entity for the operation of the business or the ownership of the property. The two most common entities for such purposes are corporations and limited liability companies (LLCs). There is virtually no reason not to form an entity. First and foremost, both a corporation and an LLC protect the shareholders, members, directors, officers, and managers against the contractual and tort liabilities of the entity to third parties. Second, the costs of formation and maintenance of an entity are relatively inexpensive. Finally, there are options for tax treatment available through corporations and LLCs that can meet the needs of most of their shareholders or members.
Corporations are owned by their shareholders. Traditionally, a corporation is governed by a board of directors elected by the shareholders, and its day to day operations are conducted by officers elected by the directors. Shareholders and directors are required to meet on a regular basis and keep minutes of their meetings. The rights, duties, obligations, and powers of the shareholders, directors, and officers are determined by bylaws adopted by the shareholders or directors.
It may be advantageous for corporations with a small number of shareholders to be incorporated as Statutory Close Corporations. Such corporations provide the same protection against liabilities of the corporation, but they are not required to have bylaws, to have meetings of its shareholders, or to have a board of directors. If a corporation operates without a board of directors, all of the corporate powers are exercised by or under the authority of, and the business and affairs of the corporation are managed under the direction of, the shareholders.
LLCs have become increasingly popular, particularly for real estate transactions. An LLC is owned by its members and is managed by its members or by managers, who may or may not be members of the company. LLCs are governed by an operating agreement which sets forth such things as the allocation of profits and losses among the members, the delegation of authority to the members or managers, the restrictions on disposition of membership interests the admission of new members, and the disposition of membership interests upon the death or withdrawal of a member. One of the advantages of an LLC is the great flexibility allowed in determining the rights, powers, and duties of the members and managers.
The choices of the proper business entity and the manner in which it will be taxed are crucial to the success of a business or investment, and to the protection and the preservation of its value. Consult with a corporate attorney and an accountant to determine the best course of action for your particular transaction.
Art Howson is a Shareholder with Gallivan, White & Boyd, P.A. where he practices in the areas of real estate, business and commercial law. He is involved in the Greenville community in through the Greater Greenville Chamber of Commerce and is past president of Greenville Friends of the Zoo, Greenville Chorale, and Senior Action, Inc.
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