One of the biggest arguments I hear for forming an LLC over a corporation is the difference in record keeping between the two entities. The LLC crowd says it has significantly less record-keeping than corps and I don’t think in a small business with 1-3 owners the amount is all that significant. I’d like to dispel a few myths here with facts.
First let me say that I’m not against LLCs – if that’s the company structure that you need or want then go for it. I happen to like corps due to the ability to go public, more easily take outside investment, the international recognition and the ease with which you can sell the business when you want to. But hey that’s me. I’ve detailed a comparison here if you’d like to read it.
Ok so what are the record-keeping requirements of a corporation? Since I reside in CA let’s go to the actual law where there is a specific section on record-keeping, Corporations Code chapter 15 on Records and Reports. (Your state may have some different requirements but I doubt they will be wildly off from what CA asks. CA isn’t known for being the most “business friendly” after all and likely wants more than your state, but to be safe go check. It should all be online.)
Each corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, board and committees of the board and shall keep at its principal executive office, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each. Those minutes and other books and records shall be kept either in written form or in another form capable of being converted into clearly legible tangible form or in any combination of the foregoing.
There’s a little more but that’s the meat of Code 1500. Let’s assume that your Articles of Incorporation (the document you filed to form your corporation) and your company Bylaws (an outline of your company organization and how it is to be run) are included as the first two items you should keep. When we add the items from the code above we have:
- Articles of Incorporation and any amendments
- Company Bylaws
- Business ledgers (& tax returns)
- Minutes of any shareholder meetings
- Minutes of any board meetings
- A record of shareholders
Code 1501 talks about an Annual Report which must be sent every year, but it can be waived if you have fewer than 100 shareholders and expressly waive this in your company bylaws – so make sure you do that. Code 1502 goes into detail about the Annual Statement of Information that must be filed so let’s add that.
- Annual Statement of Information
The rest of the code here goes over foreign corporation requirements and reporting requirements if a shareholder requests more information, but since that shareholder is you I doubt you’re going to give yourself more work. If your company is publicly traded and/or has more than 100 shareholders then there are more requirements, but in the context of a small business this seems to be about it. So how does this stack up against an LLC?
An LLC has some paperwork requirements also, so let’s go to the actual law section for that too… Hmmm. There doesn’t seem to be any actual law section for that. Are there no paperwork requirements?
There are a few actually and are just spelled out in the section on formation of the LLC similarly to the code law on corporations. It’s in section 17702 if you want to look it up. So let’s list those out too:
- Articles of Organization and any amendments
- Operating Agreement
- A record of members and managers
- Biennial Statement of Information
That list does seem to be a little smaller. You can probably tell at first glance that there are some similarities, like the corp’s Articles of Incorporation and the LLC’s Articles of Organization. It’s different terminology but amounts to the same piece of paperwork. The same goes for a corp’s Company Bylaws and an LLC’s Operating Agreement, and yet again for a corp’s record of shareholders and an LLC’s record of members and managers. Even the Statement of Information is the same except that an LLC only needs to file every other year instead of annually.
The Three “Extra” Requirements
After you get past those items it looks on the surface like there are three other requirements in a corporation that aren’t spelled out for an LLC: business ledgers (& tax returns), minutes of any shareholder meetings and minutes of any board meetings. Let’s go over them now.
Business Ledgers & Tax Returns
So is it true that business ledgers only need to be kept by corporations? Actually no. Any company that provides liability protection must operate as if it is a separate entity from yourself in order to maintain that protection. This is often called the “corporate veil” and just refers to the protection of your personal assets by keeping all of the company’s assets separate from yourself. In order to prove your company is truly separate you’ll need to keep separate bank accounts, ledgers, loans, credit, taxes and so forth.
The truth here is that you should be keeping accounting records of your business regardless or how will you know it’s a profitable venture? You’re going to want to track your expenses so you can write them off as business expenses and you’re going to need your income statements at the end of the year to do your company taxes. Once you do your taxes the IRS requires you to keep those records for a specified length of time depending on your circumstances so it looks like you’re required to keep your tax returns also. So far this isn’t looking any different for an LLC.
On a side note it doesn’t really matter what you use for your accounting system as long as it’s accurate. While I use accounting software there is nothing stopping you from using Excel or Google Sheets or your notebook and a pencil. Whatever you choose just make sure it’s separate from your personal assets. If you operate in all cash that may be easy to keep separate from your cash on paper or spreadsheet, but if you’re using a bank account then make sure it’s one dedicated to the business.
Minutes of any Shareholder Meeting
As a small company you may be the only shareholder, or you may have a couple of partners that hold shares as well. Does this mean that whenever you talk to your partners (or yourself?) you need to record the topics and resolutions? Nope. This really refers to any formal shareholder meetings and the only one you are required to have is an Annual Meeting of Shareholders.
I’ll have a future article that goes into detail on the minutes for this meeting, but for now just know that this meeting goes over the performance of the company over the past year, holds elections for director seats that are empty and may also go over a vision for the future as well. It’s just a way of reviewing the company’s year to the shareholders.
While this isn’t required for an LLC I think it’s a good idea to do it anyway. As a small business it may just be you taking a look at your past year and seeing what you’ve accomplished. As a corporation you’ll need to formalize the minutes for this meeting but that shouldn’t take more than 15-30 minutes. Imagine you holding a meeting by yourself where you summarize the past year, re-elect yourself to the board and then set goals for the next year. I think you can manage that.
Minutes of any Board Meetings
Again a small company has some big advantages here. Most states only require a single member on the board and that’s most likely you. And again you only need to keep records of any formal meetings of which only one is truly required: an annual meeting prior to the annual shareholder meeting.
This meeting is similar to the shareholder meeting in that the company past and future direction is discussed and reviewed. While a shareholder meeting elects directors, an annual director meeting elects corporate officers. The same person can be a shareholder, director and an officer, so in other words they can all be you.
In fact most corporations are required to have three corporate officers and all three positions can be held by the same person. These are the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and the Secretary. Imagine this annual meeting going something like this: summarize the past year, re-elect yourself to all three positions and then set goals for the next year. Sounds pretty similar to the shareholder meeting doesn’t it?
Aside from the annual meeting there are a few other meetings that you should probably record just to keep a record of the company’s history. Some things that might be recorded are new bank accounts, changing of the quantity or type of company stock, changes to bylaws, selection of agent for process, selection of corporate council and replacement of a corporate officer in the event a position is vacated. Basically any large decision that can affect the company as a whole should be considered for recording of minutes.
These events are not required for an LLC but I would argue that some of them should be recorded anyway. It won’t hurt to have a company history of what happened, even if your history book is less formal than that of a corporation. None of the nitty gritty details need to be written out regarding these meetings anyway and all that is required is to present the facts in a high-level way. Meeting minutes shouldn’t take more than 15 minutes to record.
Are the Record Keeping Requirements of a Corporation Really all that Arduous?
From the original list of seven items there are really only two that constitute extra paperwork for corporations over an LLC, and both pertain to meeting minutes. As a small company those two items are not very daunting and serve to record a history of your company that you may one day be glad you have. Sure an LLC doesn’t have to do them, but probably should and it certainly won’t hurt should the time come when you have to prove your company is a separate entity than yourself.
There are also basic templates for many of the meeting minutes scenarios that I’ve mentioned above that make it pretty easy to copy/paste what you need so that it shouldn’t take you much time at all. In the coming months I’ll put together a bunch of templates for the most common minutes used by a small corporation that should speed things up further. [Edit: I’ve written a simple article on how to write meeting minutes here.]
My point to all this is that the record keeping requirements of a corporation for a small corp. are not really going to slow you down at all, so I wouldn’t even use it as a factor in making the decision between a corporation and an LLC. If an LLC is right for you then by all means choose it, just don’t make that choice on the basis of record keeping paperwork.