I have heard this question countless times and yet it still causes me to shake my head in disbelief every time I hear it. The short answer is "yes, you can take this approach". However, it doesn't mean that you should. I could use this opportunity to launch a lengthy diatribe that would serve to outline my 144 point arguement against this, but I'll simply share a sad story instead:
- I recently learned about a situation that is ultimately going to cost a business owner dearly and at this point it appears unavoidable. Once upon a time a pair of family members decided to form a corporation and filed Articles of Incorporation with the MN Secretary of State's office. At the time, they were fully aware that they needed a number of other vital documents to properly complete the incorporation process, but were busy running a business and just assumed they'd get around to it later. They discussed a number of the key foundational elements, were in full agreement, and felt comfortable with their "verbal contracts".
- Fast forward about five years, and these guys are in serious trouble. They now find themselves in a litigious situation with an outside party and their "verbal contracts" are basically worthless. They have no Bylaws, no Buy/Sell or Member Control Agreement, and no clear documentation of how Shares were acquired. Sadly, this decision made several years ago is going to greatly affect their business and may even destroy it completely. If only they had spent a little bit of time and money to have their incorporation done properly, and subsequently maintained ongoing Corporate Formalities, they would not be in this situation today. Unfortunately for them, it is most likely too late.
While I wish this story was nothing more than that, a story, it unfortunately is a very real life situation that is far too common. I come into contact with these sad situations much too frequently and look forward to a day when they will hopefully be the exception, not the rule.
Please keep this in mind if you are considering forming a business, or may have already done so without the help of a professional advisor...
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