Although S corporation, or S corps, provide the same limited liability protection and the same pass-through tax treatment as limited liability companies, or LLCs, many startup businesses choose the LLC form over incorporation and filing under Subchapter S of the Internal Revenue Code. One reason for the LLC's popularity is its relatively simple documentation requirements.
Articles of Organization
When a corporation begins life, organizers file a document called articles of incorporation with the secretary of state or division of corporations in their home state, and hold a meeting of shareholders to elect a board of directors who will manage company operations. An LLC, however, starts with a document called articles of organization, which is also filed with the state. The articles of organization contain similar information as a corporation's articles of incorporation. While specific requirements vary from state to state, organizers are usually required to fill in their names, the names of all the members, a brief description of the business, the company's principal office address and a registered agent for service of process. The filing fee varies depending on the state, but it generally costs more to file articles of organization than articles of incorporation.
As LLCs have membership interests rather than shares, they have no shareholders' agreements. An LLC does, however, have a document called an "operating agreement" that covers the rules for the company's internal operations, such as the addition of new members, the removal of old members, the transfer of membership interests and a classification of membership interests. While not all states require operating agreements for LLCs, even single-member LLCs would do well to execute one; having and following an operating agreement strengthens the limited liability shield.
LLCs have no shareholders, and as such they are no subject to the corporations' requirement of an annual shareholder's meeting and the keeping of minutes which must then be filed with the state. Instead, LLCs file an annual report. This document, sometimes called a "Statement of Information," provides a record as to what important information about the company has changed. Changes in registered agent, membership, business activities, principal office location or anything else listen in the articles of organization will be reflected in the annual report. Like the articles of organization, the annual report filing requires the payment of a fee to the state.
With a corporation, major decisions affecting the company require the issuance of a resolution regarding the decision. Resolutions are often required for actions such as buying, selling or leasing real property, incurring debt and entering into contracts. Drafting resolutions can become burdensome, but failure to do so endangers the limited liability protection of the corporate form. LLCs, however, are not required to issue resolutions.