What Should I Select? LLCs vs. Corporations- Management and Formation Differences (PART 1)

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Business Corporate Attorney 

If you are reading this article, it probably means that you are looking to form a business.  You have this awesome idea, whether it is to sell the next greatest gadget, open up a local dry cleaning business, or anything in between.  One of the first questions you probably have is what type of business should you open.  You might be hearing a lot about limited liability companies, also known as “LLCs.”  80% of entities formed in New Jersey are LLCs.  Why?  Because if a lawsuit occurs, your personal liability is limited to what you put into the company, as compared to a sole proprietorship, where you can be left on the hook for its debts and liabilities (bankruptcy laws put aside).  But maybe you want investors for your company, and they are looking to own stock in your start-up so they can profit in the future from what they invest today into the company.  Either way, this blog will help explain some of the key differences between the organizations as it relates to management and formation.

The biggest difference between a corporation and an LLC is the flexibility of the management structure.  A corporation has centralized management.  Stockholders of the corporation elect the board of directors, and the Board appoints or elects officers to run the corporation as directed.  The first meeting a corporation must have is to set up its management.  At this organizational meeting, the first Board is elected, bylaws are adopted, stock shares are issued, and annual meetings of shareholders are set up.  The LLC, in contrast, does not need to have these formalities in place.  It requires only an operating agreement between the owners/members that define the management structure.  It can de-centralize power, and put decisions into the hands of many, or it can centralize power into one member, or do whatever it wishes to do, provided it is agreed to in the operating agreement.

As part of New Jersey’s newly enacted Revised Uniform Limited Liability Company Act (RULLCA), LLCs also have the ability to do away with certain duties in an operating agreement that the directors of a corporation cannot do.  For example, one of the most critical responsibilities of a corporation’s board of directors to its shareholders is the duty of loyalty, where directors must avoid self-dealing.  A simple example of this is if a corporation purchases real estate owned by one of its directors.  This isn’t to say that the deal can’t go through, but the Board would be wise to seek the approval of the shareholders before they went through with the deal to cure any conflict of interest.  An LLC, on the other hand, allows members to eliminate this duty in their operating agreements.

An LLC is a wise for a small business when it’s just you who runs the day-to-day affairs of the business you don’t want to deal with all the formality. The one caveat here is that if the operating agreement does not provide for the elimination of the duty, the duty still remains according to the law.  Therefore, consider the dynamics of your business and what you hope to accomplish before choosing the structure that works for you.

To discuss your NJ LLC matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

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