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Choice of Business Entity Blog Series, Part 3: Legal Requirements

In the third and final installment of our three-part blog series on choice of business entity, we will examine how the different legal requirements of the business entity may affect your operations going forward.

Like other business lawyers, we are always focused on the legal requirements of the entity; however, it is vitally important that business owners consider these requirements before moving forward with the selection of an organizational structure. After the initial formation of the business entity, the business owner is responsible for the required ongoing corporate maintenance. Some of this maintenance may include annual meeting minutes, fulfilling proper meeting notice and quorum requirements, and annual filings with the state of incorporation. Although the business owner's general counsel should always have their finger on the pulse of the entity's legal needs, the business owners should consider how onerous these requirements are prior to selecting an organizational structure.

One major example of these requirements is the requirement of annual meetings. If the business owners select the corporate organizational structure, they should be aware that the entity is required to hold an annual meeting of the corporation's shareholders to elect directors and are customarily required to hold an annual meeting of the board of directors immediately after the annual shareholders' meeting. Even if this requirement is not mandatory by statute, the corporation's bylaws may require the annual meeting of the directors. In contrast, limited liability companies (LLCs) in California are not required to hold annual meetings (although it is often a "best practice" to maintain a certain level of organizational formality). In addition to the flexibility offered by LLCs as related to their tax treatment, California LLCs are typically thought of to have more flexibility in their legal requirements, as opposed to their corporate counterparts. As you can see in this example, these different legal requirements should be considered by the business owner because failure to follow certain required formalities may jeopardize the limited liability shield of the corporation or the limited liability company.

If you have additional questions relating to which structure will work best for your specific business objectives, contact the experienced business attorneys at The Loftin Firm, P.C. today.

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