By Jonathan D Shepherd
Basic business structures include sole proprietorships, partnerships, corporations (both C corporations and S corporations) and limited liability companies (LLC). LLCs are business structures recognized by state statutes that can be treated as a sole proprietorship, corporation, or partnership.
There are many factors that should influence a business owners’ decision regarding the best business structure to use. Liability and asset protection are often the reasons for forming a corporation or LLC and it is not uncommon to create one or more corporations or LLCs to separate land and building holdings from other assets. Usually, the desire is to protect the farm land from the risk of being lost in a lawsuit. Corporations and LLCs can help create a barrier between the operations of the farm and these assets. However, the recordkeeping practices and financial actions of the business owner can jeopardize this barrier.
When a corporation or LLC is formed, a separate legal entity is born. It is legally recognized as separate from any other business entity you had prior to the creation. You may still be the owner, but the newly created corporation or LLC is distinctly different. This is a very important distinction and an area where many business owners are putting themselves at risk of losing the protection they were seeking.
While it is strongly recommended that any business has its own bank accounts and financial records, it is required for corporations and LLCs. Corporations and LLCs do not have families or children so financial records should not include family living expenses. While the monies that are transacted in the corporation or LLC may seem to be yours, the way in which you access those funds determines whether or not the business is recognized as a separate legal entity, or as an extension of your personal affairs. There should never be money taken from the corporation or LLC to pay personal expenses directly. Monies from the corporation to the owner(s)/shareholders should be labor expenses, loans to shareholders, or distributions and if is recommended that salaries are established and dispensed on a regular basis from corporations.
Corporations also require other record keeping items including adherence to corporate bylaws that were created when the corporation was formed. Bylaws dictate how the business will be conducted, when director and shareholder meetings will be held, and how the corporate books will be maintained, among other items. Regular shareholder and director meetings need to be held and documented. This is especially important when making major changes or important decisions. These actions require meetings and documentation in corporate minutes which should be signed by directors or shareholders and kept for future reference.
LLCs are not required to have bylaws, but should have operating agreements, which are very similar to bylaws. An operating agreement explicitly states items such as ownership percentages, how profits will be distributed, voting rights, etc. While this is not required, establishment of and adherence to the agreement can be beneficial if the legal separation between business and personal affairs is ever questioned. Documentation concerning meetings and votes should be maintained within the LLC.
There are other factors that can affect the legal perception of your corporation or LLC as a separate legal entity as opposed to an extension of your personal affairs. The importance of treating your corporation or LLC as a separate legal entity cannot be overstated. This will maintain the integrity of its structure and help ensure that the protection you are seeking is legally recognized. It is suggested that you seek legal advice before determining which business structure is best for your operation.
