What are corporate formalities?

Although a corporation can provide excellent limited liability, the laws of the state in which it was formed require certain corporate formalities to be observed in order for such limited liability to be effective. Contrast this with LLCs and LPs, which have no such formalities and are thus much easier to run (although they should still be operated with a valid purpose, without commingling business and personal assets, and so that the company is a separate from its owners.)

Such corporate formalities include:

• An annual meeting of corporate board members.
• A meeting and recording of corporate minutes and resolutions when any strategic management decisions are made. (Observing this can be a real pain for small and medium businesses! Failure to observe this can cause liability problems for the decision-makers.)
• Observance of a three-tiered management structure, namely:
  • The corporate board, headed by a chairman, who make strategic decisions for the company and hire its corporate officers.
  • Corporate officers who oversee the day-to-day affairs of the company.
  • Voting stockholders, who elect the corporate board.

It should be noted that even S corporations are bound by the above formalities. However, an LLC can elect to be taxed as a C or S corporation, if it wishes to, by filing IRS form 8832 (and then form 2553 if it further wishes S corporation tax treatment). Therefore, if C or S corporation tax treatment is desired, it is almost always preferable to use an LLC that elects such treatment over an actual corporation, unless the company plans on having a public offering.