By: Mike Einterz

Issue 1: CORPORATIONS:

            Entrepreneurs are people with good ideas and an above average risk tolerance.  They are generally the driver of the vehicle and not the navigator.  This often allows the entrepreneur the ability to push through difficult times, but not always the ability to see the difficulties coming, or to plan for their occurrence.  Good attorneys are navigators for their entrepreneurial clients.

            Like any good navigator, the attorney will start with the map and a set of directions.  This means the form of the business enterprise: corporation, limited liability company, partnership, limited liability partnership, sole proprietorship.  This will be dictated by the needs of the entrepreneur.

            Corporations are the traditional form of business.  It insulates the owners/shareholders – from personal liability for the ills of the corporation, while sharing the profits of the corporation through dividends.  Corporations stand as a separate person under the law, and provide great flexibility in attracting investors and allocating ownership.  They are guided by a board of directors who may or may not be shareholders.  They are managed by officers including a president, treasurer, and secretary.  They are created on a state-by-state basis through the filing of articles of incorporation with a given state’s secretary of state or corporations division.  For corporations that operate in more than one state, they need to be authorized to do business in any state not their state of incorporation.  This is accomplished by the filing of the requisite forms with each state’s secretary of state to register as a foreign corporation, including registration with the appropriate taxing agencies of that state.  (Sales and income taxes as well as employee taxes may be required in a given state depending upon the work performed or product sold in each particular state).

            Corporations act through its officers and its employees based upon authorized courses of action detailed in the bylaws and also by the board of directors as set forth in corporate resolutions and corporate minutes.  These documents are maintained by the secretary of the corporation and cataloged in a corporation’s books.  The shareholder registry, copies of stock certificates, the articles of incorporation, the bylaws, the minutes and corporate resolutions, and critical corporate documents are all maintained in the corporate books by the corporate secretary.

            Significant changes to the corporation such as mergers or dissolutions are accomplished through board action followed by the filing of appropriate documents with the secretary of state or corporations divisions.  Similarly, when the corporation achieves a certain size or elects to have publicly solicited shareholders or publicly traded stock, then a new level of regulatory oversight and compliance or required.  At that point, simplicity becomes a distant memory and formality and compliance become necessary and expensive.

            Concentrating on the closely held or privately held corporation reveals that there are several pitfalls to be avoided.  If the corporation is to be treated under Subchapter S (Form 2553) of the IRS Code (taxed as a partnership or sole proprietorship), the proper forms must be timely filed with the IRS within 3 months of creation.  Failure to file will deny the shareholders of the ability to treat profit and loss from the corporation as a pass through to the individual tax return.  Failure to formalize the ability to reacquire stocks from other shareholder owners through a buy/sell agreement could leave the entrepreneur without control over his own company.  And, finally failure to document properly the bylaws or resolutions of the corporation may nullify a given transaction or cause the corporation’s veil to be pierced and personal liability imposed on the shareholders.

            Selecting the appropriate navigator – attorney – will allow the fast charging entrepreneur to concentrate on creating the substance of their business while leaving the form to the attorney to create.  For more on the forms and processes of incorporating or pursuing other business ventures contact Einterz & Einterz or visit its website.  We will address LLCs and other company forms n a future blog article.