10 Myths Corporation & LLC Owners Must Reject To Survive

 Powered by Max Banner Ads 

You probably made the right decision to incorporate or form an LLC for your business, and like 90% of busy business owners, you probably dived right in after setting up your entity, leaving many questions unanswered. If that were not enough, you likely have a
few misconceptions about your company.

This report was created to shake things up before it’s too late. There’s an unpleasant reality that needs to be addressed, and it’s this; the moment you incorporated or formed your LLC, you took on a huge responsibility. You were probably told you only had to hold only one meeting per year for your corporation. Or you were informed that your LLC didn’t require meetings at all. Remember that? Well, these are half-truths; and no one likes half-truths. But these initial misconceptions are just the tip of the iceberg of misinformation that should be broken in pieces here and now. And since you are indeed busy, let’s fetch the sledgehammer without delay.

1. MY CORPORATION IS REQUIRED TO HOLD ONLY ONE MEETING PER YEAR.

This myth is rife with misconceptions. First, and unfortunately, most corporate owners are not aware that the meeting referred to here is a Shareholder Meeting, but it’s true that most state laws do require it. This Shareholder Meeting each year is primarily for the purpose of electing Directors to manage the company for the upcoming year. This is necessary because a corporation is supposed to be managed by its directors, not its shareholders; so it makes perfect sense that this fundamental procedure is required by the state. But further, it’s required because it protects shareholders by permitting them to control who is in management, thus keeping management accountable.

Now, you usually won’t see a law that requires Director Meetings. Does that mean that Director Meetings are not legally required? Well, the answer is no. Not everything that is required is necessarily spelled out in a statute. Where there are no Director Meetings, there is no authority for the company to act. Director Meetings are also where you elect officers. We know the state requires officers, so why doesn’t the state mandate a Director Meeting? The point is, you have statutory requirements, but you also have responsibilities the law expects you to uphold, or else. A quick glance at your corporate bylaws should be very enlightening on what you should be doing to properly govern your corporation.

Lesson: Hold your Annual Shareholder Meeting each year as required, but also hold an Annual Director Meeting immediately thereafter. Further, make it a practice to hold and properly document a Special Director Meeting at least quarterly in order to 1) condition yourself to think and act like a corporation or LLC, 2) promote accountability, and 3) demonstrate to any court your diligence in following good corporate form. This is vital, especially in a court system that relies so heavily on concepts of “fairness.”

2. IT’S OKAY TO HAVE MY ATTORNEY/ACCOUNTANT PREPARE MY COMPANY’S ANNUAL MEETING MINUTES.

At the risk of troubling some good folk, farming out your Minutes is not a very sound policy. Yes, many attorneys and accountants provide this service to their clients, and of course it is better that they prepare your Minutes than that you have no Minutes at all.

This discussion isn’t intended to criticize any attorney or accountant for helping his or her client; that would be like criticizing a dentist because a client who never cleans his own teeth goes to him every month to have his teeth cleaned. If the client doesn’t know how, or refuses, to clean his own teeth, then by all means he should go and get whatever help he can. But I’m here to say that one cleaning every month, no matter how good it is, is not going to save his teeth. Most attorneys and accountants would readily agree that clients who come to them to have their Minutes drafted do so because they are not comfortable doing it themselves. I’m asserting that the client must embrace this challenge personally or there will be hell to pay. But, do as you wish. I only want you to understand the big picture.

Take a look at any Minutes template you can get your hands on. You will notice that it’s a record\ of an event wherein many procedural transactions occurred. For instance, the Chairman of the Board called the meeting to order; the secretary of the meeting had those in attendance sign an Attendance Sheet to indicate their presence; the secretary also had the attendees sign either a Waiver of Notice of Meeting or a Receipt of Notice of Meeting; the Chairman set forth certain issues that another seconded, then all unanimously approved. Need I go on? I think it’s safe to say that in 90% of such cases, these meetings never occur, and that is the nub of the problem. You have a document that alleges a meeting occurred; but everyone knows it’s, well, for lack of a better word, a farce.

Now, is it likely you’ll get in trouble for doing this? Probably not, but it really depends on the circumstances; I can imagine some nightmare scenarios where this could indeed get you into\ hot water; especially if one of the alleged attendees does not like what you assert was approved at your meeting.

But there are other consequences to farming out your Minutes. What about the fact that the secretary of your company is supposed to attend the meeting (see your Bylaws), provide notice of the meeting, take notes at the meeting, then prepare the Minutes afterward and get written approval of these Minutes from all attendees. Farming out your company Minutes indicates you have no functioning secretary. Any attorney will tell you that non-functionality of officers is a strike against you in the context of a legal challenge.

Lastly, having a third party prepare your Minutes when you know there was no real meeting is not only an evasion of your responsibility as a business owner, but it causes you to lose out on one of the greatest opportunities to learn how your company works. The procedural nature of meetings allows business owners to practice their roles, and thus it conditions them to think and act like a corporation or LLC. Further, the meeting process encourages accountability and demonstrates genuine attentiveness to proper business formalities. This is what you want when (not if) the opponent wants to see your books.

Lesson: Your company secretary needs to learn the ropes. It’s the only way to run your
business by the book. If you feel you don’t have time, find a capable friend to help you.
Appoint him or her as secretary of your company and pay him or her something reasonable to keep your books as secretary. Nothing says you can’t hire your accountant or attorney to be your company secretary, but remember that the process is more than generating Minutes. The job needs to be done properly. If you need a powerful resource to make things quick and painless, where the entire meeting process can be mastered fast, consider
.

3. MY LLC IS NOT REQUIRED TO HOLD MEETINGS.

The discussion here is a little different than our discussion regarding corporation meetings, in that LLC’s (i.e., Limited Liability Companies) are not laden by statute with the same procedures as corporations. However (and this is a huge “however”), corporate procedures, and in particular meetings, were not invented for the purpose of cramping your style and distracting you from other more important things, like earning a living.

Corporate procedures exist because they’re necessary to focus efforts, facilitate deliberation, and promote accountability. It’s also important to realize that LLC’s have not been around long in the United States (since 1977), thus the rules and laws that govern them are not quite settled. Truth be told, despite the alleged simplicity of LLC’s, they can be quite confusing. Consider that LLC’s can be managed by managers or by their members. And they’re generally not required to have officers, but may (and should).

The lack of statutory requirements can actually serve to make many LLC owners lackadaisical, and as a result, some have learned a harsh truth, which is courts are equally
inclined to pierce LLC veils as they are corporate veils. Imagine that.

Lesson: Hold meetings, even if you’re not statutorily required; and consider appointing officers for your LLC, because doing so clarifies and gives definition to each person’s role(s) within the company. The beauty of running a business this way is that it’s transferable to any business type; it’s simply the most effective way to conduct any business enterprise. Once you learn the form, it’s a piece of cake.

4. IF I CAN JUST KEEP MINIMALLY COMPLIANT, I WILL BE ABLE PRESERVE MY COMPANY’S CORPORATE/LLC VEIL.

Minimal compliance is like walking into a restaurant wearing only shoes and a shirt. Yes, you can claim you complied with the sign outside and demand to be served, but you are likely to be thrown out on your ear.

What is “compliance” anyway? Let’s just cut to the chase and admit that if the only thing you do for your company is have an Annual Shareholder Meeting and file your Annual List of Officers, you’re in a sorry condition, and the last thing you want is IRS or legal scrutiny. In that case, you’d have no Directors Meetings or even Directors’ Consent to Action without Notice to show that proper decision-making processes were in place. You’d have no functionality of officers. You’d be guilty of co-mingling funds. I could go on. Any of these can sink your boat in a heartbeat.

Lesson: Minimum compliance is of minimal value. It is at best a single stroke in your race to cross a raging river. Stop after the first stroke, and you might as well have stayed ashore. Maximum compliance should be your goal, since you need all your skills and determination to survive. Strive for ultra-compliance. Use a service such as IncorpAcademy.com to make the learning process enjoyable and efficient.

5. S-CORPORATIONS ARE NOT REQUIRED TO PAY SELF EMPLOYMENT TAX.

I’m not going to quote the IRS here because falling asleep is the last thing you need at the
moment. But here’s the rule. You must have an employee if you own a corporation. The logic is that someone has to run the business, and since the business is not the same as the person running the business (as in a sole proprietorship), that person must logically be an employee. Thus, that employee has to be paid. And the money that you pay that employee is earned income. And earned income is subject to FICA, which is 15.3% of most of his or her earned income. Of course it is split between employee and employer, thus 7.65 percent is paid by each. Well, in a one-person corporation, if you are the president (or any other officer for that matter), and if you are actively engaging in running the business, which the IRS will assume you are if any money is being made, then you must get paid. And you must pay “earned income” taxes on that amount. When you were a sole proprietor, you paid “Self Employment” taxes. But now that you’re an employee, this same 15.3% is now just called FICA. It’s the same thing. If you do not pay any, you’ll get in trouble, assuming money is being made in the business of course.
Now, do you have to pay all corporate income out to you as salary? Of course not. In fact, the IRS requires that you pay a “reasonable salary.” What is that? Good question. It’s arguably what you say it is. Check Salary.com and do some research. Once you have determined what that reasonable salary is, everything else can be paid out as “passive income,” that is, stock profit, not subject to FICA, i.e., Self Employment tax. Talk to your tax person. If you find that a reasonable salary is equal to your company’s total net income before wages are paid out, you might be able to use a formula (e.g., 40% salary, 60% distribution) or split the difference. But this is definitely something you will need to discuss with a tax professional.

Lesson: You must pay a reasonable salary to at least one employee when your company is making a profit. Otherwise, an audit may end up taking its toll on you for more than one year, and that with penalties and interest.

6. MY ATTORNEY/ACCOUNTANT TOLD ME MY CORPORATION/LLC WON’T PROTECT ME IF I’M THE SOLE OWNER.

This is blatantly false. However, it has a semblance of truth for one big reason, which is this: sole owners are generally terrible at running their entities by the book. When this neglect is exposed in a particular instance, courts are reluctant to protect the sole owner since it would be unfair to reward corporate neglect with protection. So the issue is that most solely owned entities are rife with non-compliance. As a rule, those entities are dead on arrival. But it’s erroneous to say they’re subject to piercing simply because they have one owner.

That said, sole owners bear a greater burden to show compliance and diligence because they’re working against a real, albeit unfair, presumption that they’re not administering their business entity as mandated.

Lesson: Run your entity by the book; hold required meetings (yes, even by yourself); document all important company decisions; and learn how to play multiple roles despite the feeling that someone thinks you may be crazy. You formed an entity, so now you have to play according to the rules if you’re going to survive.

7. AS LONG AS I USE A “CONSENT TO ACTION WITHOUT MEETING,” I DON’T NEED TO HOLD REAL MEETINGS.

There’s one problem. State law requires at least one Shareholder Meeting per year for
corporations. Aside from that, there is no explicit prohibition that I’m aware of that says you\ can’t do this. But, refer to my diatribe above as it relates to the necessity of holding more than one meeting per year, especially Director Meetings. Consents are fine, don’t get me wrong, but if you avoid meeting altogether, you’ll not benefit from the deliberation process. It is a healthy process. And it also accommodates the reality that not everyone always agrees. It’s not a good idea to use a Consent to Action unless you have anonymity.

Lesson: Consents to Action w/o Meeting are okay, but not as a replacement for Annual and Quarterly Director Meetings.

8. CO-SIGNING FOR MY CORPORATION IS UNAVOIDABLE.

When you co-sign for a person, you’re promising that if something goes wrong, you’ll be 100% responsible for his or her debt. When you co-sign for your company, you’re doing the same thing. It’s commonplace for businesses, especially in lease agreements, to require the co-signature of shareholders or members. The problem is, if you do not exercise a willingness to walk away from a deal, you’ll be forever liable for the debts of your business. Why bother incorporating?

Keep in mind that business owners who desire to do business with you know you’ll do the best you can, especially in a lease arrangement, where you’re likely to sink thousands of dollars in fixing up the property. And you are not likely to abuse the property, since it is in your best interest to keep it looking good. The reality is that demanding co-signature in a lease arrangement is gratuitous overreaching in the opinion of this author. To avoid this manipulation, state up front that you will not co-sign, and see who ‘s willing to come to the table under those conditions. Some will. Your entire financial well being is on the line. Co-sign with extreme caution, if at all. Try to negotiate a release of personal liability after 6 months of timely payments. Do what you can to minimize liability.

Lesson: Just say no to co-signing. Unless someone has something your company can’t possibly do without, and only after you’ve made every effort to find another vendor and negotiate, then you might have to co-sign.

9. IT’S OKAY TO PLAY ALL OFFICIAL ROLES WITHIN MY CORPORATION OR LLC.

The truth is, it is okay. However, when you play all roles in your company, for instance,
President, Secretary, Treasurer, Director, and sole Shareholder, you are likely to not play any\ role well. If it’s feasible, consider bringing someone on board to help. If you are unable to share even a small amount of ownership, that’s fine; but consider having someone else be an officer and/or director. It promotes better business practices when someone can help keep you on track and accountable.

Pay someone a small amount to act as secretary and make sure all secretarial duties are
performed, such as notifying about meetings, attending meetings and preparing Minutes
thereafter, etc. Having a second director allows you to engage in some deliberation about
important business decisions, and it thus shows you are not treating your entity like your “alter ego,” in other words, a mere extension of yourself. If you are able to share ownership, this means someone other than yourself has a vested interest in the wellbeing of the company, thus you will be less inclined to bend the rules, such as skip meetings or draw money from the business without proper documentation.

Lesson: Adding players militates against claims that the company is merely a cover for your personal agenda. Instead it evidences accountability.

10. I CAN DO EVERYTHING BY MYSELF.

This sounds a lot like myth #9 above, however the emphasis here is not on getting others
involved within the company, but on keeping up with documentation and procedure. Maybe you can do it yourself, but if you’re like 90% of business owners, and there’s a 90% chance you are, you won’t keep up. First, you’ll feel silly holding meetings all by yourself, so you won’t do it. You likely not generate Consents to Action w/o Meeting, because you’ll think you’ll be able to generate those quickly if you ever need to show your books.

But this sort of thinking usually comes back to haunt people, because with time comes
forgetfulness. Neglect and inattentiveness leave a trail of their own in the form of missing or improperly signed documentation, undeclared transactions between you and the business, etc.
In fact, you’ll find that your books will evidence very little in the way of documentation, and won’t be able to get it all together when you need it. It happens all the time.
You really should get some assistance. If you don’t want help, then sit down and learn what you need from books (there are plenty out there) and apply it. Yes, it’s time consuming, but one way or the other, you need to face the challenge. If you decide to seek help, you can employ a professional to guide you through the processes. Even if the cost is a little high, you need to do something. There is a third alternative. One that will maximize your success and is still affordable. Consider joining a business-compliance and training program such as IncorpAcademy.com. IncorpAcademy was designed to hold your hand while zipping you through the corporate processes quickly. It’s informative, friendly, and especially entertaining format makes the entire corporate process not only tolerable, but to many, outright pleasant.

Lesson: Make the effort to master the processes, whatever it takes; but keep up with required procedures one way or the other. You’ll be ready for anything that’s thrown at you as long as you stay on top of things. Consider using a powerful program such as IncorpAcademy.com to bring your documents current and train you for success.