I have a cat and a dog at home. The cat, he could not care less about me as long as he’s got food and water and someplace to nap. The dog, on the other hand, needs constant attention, affection and care.
Sure, they’re both domesticated house pets with four legs and fur, but they are totally different creatures. The differences between cats and dogs are a lot like the differences between some of the most common business entities that people choose.
I think that LLCs are like cats, and corporations are like dogs.
You might get a cat or a dog for largely the same purpose – comfort, cuteness, companionship, love and affection – but they are very different creatures, and although their functions are similar, they demand very different treatment.
Similarly, LLCs and corporations are formed for many of the same purposes – personal asset protection, tax structure, increased legitimacy to customers or investors – but although the purposes of these entities are similar, their management, operation, and regular maintenance obligations are very different.
Cats are pretty independent; they might ignore you and expect to be ignored for hours or days on end, and they don’t really care. That’s one of the benefits of having a cat.
LLCs are a lot like that. LLCs don’t usually require a lot of annual formalities, approvals or maintenance. Beyond the basic care needed to keep them in good standing, LLCs can afford some neglect and it’s not a big deal. That’s one of the benefits of an LLC.
Dogs, on the other hand, are needy. Dogs wait for you by the front door to greet you when you get home; dogs need constant affection, exercise, and care. Without all this, your dog will become sad and unhealthy.
If you neglect your dog, the benefits of having a dog will go away and instead you will have a sad dog and a stack of veterinary bills.
Corporations are dog-like in that way. Corporations require regular maintenance, and operate under a formal structure to which the business’s activities need to adhere.
With a corporation, any business decision outside of the ordinary course of business needs to pass approval of the board of directors; every single year, there needs to be a meeting of the shareholders and a meeting of the board of directors, with advance written notice, and accurate minutes of those meetings need to be kept in the corporate minute book.
Corporations need attention and maintenance, and without that care, the benefits of a corporation can go away. The corporation’s liability protection will be vulnerable to piercing, and the personal assets of the shareholders could become subject to the liabilities of the corporation.
So which is better? Corporations or LLCs? Dogs or cats?
When comparing corporations to LLCs, there are benefits and drawbacks to each, and it depends on what your needs are, and what your business activities are like.
To be sure, maintenance obligations are an important consideration to be taken into account when selecting a business entity (or pet).