Periodic Maintenance for Your Business

We think nothing of visiting the Dentist every 6 months, and the Doctor for an annual checkup. Likewise, most of us regularly maintain our automobiles. Regular maintenance of your business is every bit as essential.

The most common business entities used in Michigan are the Limited Liability Company and the Corporation. Less common, but still often found, are general partnership and sole proprietorship. There are numerous variations of these entities which each serves its own specific purpose and will often require specialized tools and knowledge.

Corporations

Corporations were the entity of choice for many years. The primary advantage to the corporate business form is limitation of liability for its owners. Secondary advantages include the ability to structure plans for management, buy-sell provisions, succession and estate planning, and in some cases tax advantages.

But there are also disadvantages. Corporations are inherently more "formal" and require more legal maintenance than other forms of business. The Michigan Business Corporation Act (MBCA) requires certain formal actions every year. The shareholders of a corporation must elect or appoint a Board of Directors. The Board of Directors must elect or appoint a minimum of 3 officers: a President, Treasurer and Secretary (they can appoint such other officers as are convenient or appropriate including vice-Presidents).

The Act contemplates a formal annual meeting of shareholders and annual meeting of directors. But it also recognizes the many small businesses act informally. Thus the MBCA also allows a written consent resolution, signed by all the shareholders and directors to be executed in lieu of an annual meeting. While the majority of my clients do just that, we often recommend that the parties hold an actual annual meeting, with all of the businesses strategic and professional advisors in attendance. This can include the attorney and accountant for the corporation, and may also include bankers, financial advisors and insurance professionals. Getting everyone in the same room at one time often assists with the "team" of advisors all being on the same proverbial "page."

The most important thing to realize is that failure to observe this very simple annual requirement can result in a loss of the very liability limitation that was sought by incorporating in the first place!

Corporations must also pay a modest annual fee and file a Michigan Annual Report each year. Failure to do this for more than 2 years will result in the State automatically dissolving the corporation. I have had clients surprised by this more than once over the years.

It is a good idea to document important corporate decisions in writing, either by a written consent resolution or by written meeting minutes, which should be kept in the official corporate record book.

I often find that corporate have no proof of their stock ownership. Every stockholder should have issued a corporate stock certificate in the name of the corporation, issuing the appropriate number of shares of stock to the appropriate owner. I often meet with new corporate clients who have "been incorporated" for years, and have never procured a corporate record book, have no stock certificates and no meeting minutes or consent resolutions.

Limited Liability Company

Limited Liability Company (LLC) is today's usual entity of choice. The LLC can give its owners all of the advantages that have been traditionally enjoyed by the corporation, but with less formal "maintenance" and more flexibility to accomplish the owners' goals in most instances.

Unlike a corporation, there are very few additional "formalities" required for an LLC. Like a corporation, the LLC must file a Michigan Annual Report (MAR). Different from a corporation, failure to do this does not result in automatic dissolution. Instead, the LLC becomes "not in good standing." This may be even worse that dissolution. The name becomes available for others to use and if, after a number of years, you wish to dissolve and terminate the LLC, you must pay the "back" fees and penalties, bring the entity up to date, and then dissolve it.

Aside from the MAR, there are no other formalities required. There is no requirement for officers or directors in an LLC and there is no annual meeting, minutes or written consent requirements (this does not preclude the business from documenting important decisions and events in writing and that may be a good idea in some cases).

Governing Agreements

Whether your business is a Corporation or a Limited Liability Company, if there is more than one participant, a governing agreement is essential (corporations have shareholder agreements and LLC's have operating agreements). These agreements address important management, voting, distribution, succession and buy and sell issues.

It is important that before embarking on the establishment of one of these business entities, you consult with both your tax and legal advisors. While we often see tax consultants "setting up" corporations and LLC's, unless they are also practicing business lawyers, they should not be doing so. Too often, they get the numbers and official filing done (though not always correctly), but fail to complete important legal, technical and practical steps that must be considered when establishing a business entity.

Third party services like the popular internet "legal" provider may have perfectly good forms–but that is all they are; forms. It is a bit like buying a hammer and a saw and thinking you are now qualified to build your own home.