Q: I'm starting a Web-based business and leaning toward incorporation rather than an LLC because I'd like to attract employees by issuing stock. I understand that corporations must have boards of directors that hold meetings and vote. At this stage my company is just myself. Can a one-person board of directors legally exist? How could it perform functions such as voting?—M.D., Elkridge, Md.
A: Planning your business structure (BusinessWeek.com, August/September, 2007) is important, and making an uninformed decision can lead to unpleasant surprises down the line. So you're starting off right by inquiring about the details. However, you've fallen prey to a common misconception that prevents many small business owners from incorporating (BusinessWeek.com, 10/3/07)—even though that may be their best option.
Owning a corporation is not as difficult as many people assume. Not only can sole-director boards of directors exist, but they are common to single-shareholder corporations and are legal in many states, including Maryland. Michael Hanley, a certified public accountant with Merl & Hanley in Smithtown, N.Y., says that the typical "room full of suits" that most of us picture when we think about a large corporate board of directors is not necessary for a small corporation. "As the 100% owner of the business, you can act as the corporation's sole director. You must hold an annual shareholders meeting during which minutes must be kept, a task that proves fairly easy for you as the sole shareholder," he explains.
Los Angeles business attorney C. Dickinson Hill says that required corporate annual meetings can be accomplished by written consent. "Typically these [actions] would include [things like] the shareholders' annual election of directors and the board's election of officers," he says.
Gerald Bloch, an attorney with the General Counsel of Orange County, Calif., explains that corporations have three tiers of participants: the shareholders, who elect members to the board of directors; the board, which in turn appoints officers to manage the company on a day-to-day basis; and at least three corporate officers: president or chief executive officer, treasurer or chief financial officer, and secretary. "The structure applies equally to the single shareholder corporation—it's just a matter of having the proper documents. The corporation must issue a stock certificate to you showing that you are the shareholder. Minutes must be prepared in which you, as the shareholder, elect yourself as the sole director to the board. Another set of minutes must be prepared covering board of director matters, which would include showing that you, as director, have appointed yourself to the three officer positions," he says.
Your attorney should be able to prepare these documents and your annual minutes on a routine basis for a reasonable fee. Signing the documents and keeping them in your business records is key to maintaining your corporate integrity, which can help shield you from personal liability if your corporation gets sued.
Employees Can Take Stakes in LLCs
Make sure that you get expert advice for your specific situation before you choose a corporation over a limited liability company (LLC), however. "The offer of corporate stock ownership can be appealing and it is a concept more easily understood by most prospective employees than having an interest in a limited liability company; however, that should not be the deciding factor," Hill says. A corporation has less tax and economic flexibility than an LLC and corporations have a more formal, hierarchical structure that contributes to greater startup costs.
"Generally, an LLC can later be incorporated tax-free if the corporate form becomes desirable, and an LLC can offer employee incentives similar to corporate stock ownership," Hill says.