It is impossible to describe the vastness or the richness of the Internet as a resource for individuals starting a new business. Indeed, many new ventures, if not most, are themselves Internet businesses. The efficiencies offered by the Internet are truly staggering. That said, there are more than a few risks and shortcomings when one relies too heavily on the promotions offered by many websites.
“Incorporate or Form an LLC Now” or similar Internet offerings is a good example. The Internet vendors that offer these services will form a corporation or limited liability company very quickly and at a very low fee, sometimes less than $100 plus state filing fees. In the bygone era of paper documents, a person starting a new business would typically have consulted an attorney about forming a new business. The attorney would have charged substantially more for the same service as today’s Internet vendor. Why the difference? Is it just the outrageous hourly rates charged by attorneys? (Having been a lawyer for over 30 years, the author can ask the question in that way.) There may be some of the latter but the real cost is in the time required for the attorney to ask the right questions, review alternatives with the client, and discuss the future requirements for the legal entity chosen. What type of organization is right for this business (C corp.?, S corp.?, LLC, close corporation?, limited partnership?); in which state should the company be formed?; what other documents are required and in what order and within what time periods should they be filed, if at all (by-laws, organizational minutes, EIN, state employer filings, S corp. election, bank accounts, filings in other states); and what else should the organizers be thinking about (shareholder agreements?, buy-sell agreements among shareholders?, non-competes among founders?). Finally, what regulatory compliance issues should the organizers be aware of and address at an early stage? Good advice from an experienced attorney at the beginning can save many times the cost of a mistake over the long-run.
In contrast, Internet vendors will take some basic information, offer simple advice in a few words on their website (corporation or LLC?), make the state filing, perhaps provide some very basic documents (e.g., one-size-fits-all bylaws or operating agreement), charge the customer’s credit card, and move on to the next name on their list. What happens going forward? Well, therein lies the problem. The principal reason to form a corporation or LLC is to shield the shareholders of a corporation or members of an LLC from personal liability. If the organizer of a corporation or LLC does nothing further about corporate governance after the act of formation, there is a significant risk that the corporation or LLC will not provide the shield that was intended. Plaintiffs, creditors and government agencies may be able to “pierce the corporate veil” and reach the assets of the shareholders or members. The Internet vendors conveniently omit any discussion of this risk because good corporate governance adds to the cost of having a corporation or LLC and such future costs might discourage the act of formation.
Moreover, maintaining a corporation means more than simply holding a five-minute meeting of shareholders once a year to elect directors, followed by a five-minute meeting of directors to appoint officers. The directors—even if they are the same individuals as the shareholders and the officers—should discuss financial results, any problems, and any proposed changes to the company’s operations or business plan. In addition, good corporate governance means regulatory compliance. Every business should understand the spectrum of regulations with which it must comply. In today’s business environment, this is no small matter. It is not something that the officers of the company can think about from time to time when they are so inclined, relying on web-based business news to tell them about new regulatory developments affecting their business. Compliance should be handled systematically and should be an important agenda item for meetings of the Board of Directors. At a minimum,
- Compliance Program. Every business should have an internal document that describes the federal and regulations applicable to its operations, lists the policies and procedures of the company that will be followed to meet such regulatory requirements, and identifies the officer or officers of the company who are responsible for compliance.
- Corporate Governance. Compliance is ultimately the responsibility of the Board of Directors of a corporation. The Board should meet regularly and should have a report before each meeting describing any compliance issues and any new regulatory developments or proposals since the last meeting (or a note for the minutes of the meeting that there were none).
- Risk Integration. Any proposal to change a company’s business model or expand operations, such as new interstate or overseas activities, should be analyzed in terms of regulatory implications, compliance costs, resource requirements (e.g., the need to train employees, hire consultants, make filings in various jurisdictions), and the risks and consequences of non-compliance. This analysis should be presented to the Board of Directors along with the discussion of financial and operational factors.
This matter of compliance is more complex and more threatening than it may appear. See “The ERISA Dragon May Tear Away Your Veil” below (October 2010).
The filing to form a corporation or LLC can be accomplished in fifteen minutes over the Internet. Do not be seduced into thinking that proper maintenance of a corporation or LLC is so simple.