When starting a business, one of the most important steps to take is deciding whether to structure your business as an LLC (limited liability company) or a corporation.
However, what seems like a straightforward process actually comes with multiple questions:
Ultimately, the answer to most of these comes down to two factors: time and money.
Structuring your business in an LLC or Corporation essentially makes your business its own separate entity in the eyes of the law. That means, from a business standpoint, any owners are generally not personally liable for any financial debts or other obligations of the business.
So, for example, if another party files a lawsuit against your company, you are not personally responsible for paying for the party’s settlement out of your pocket.
The only exception in this case would be if negligence played a factor in the claim – you may be personally liable for the damages in those circumstances.
Although all the available business structures provide liability protection, they may each provide independent benefits of each other. Therefore, it’s important to choose which one best suits your company’s needs.
Generally, most entrepreneurs decide to file for an LLC or a corporation after they’ve started generating enough revenue to require protection.
However, this exact amount differs from person-to-person and business-to-business. Before deciding when to file, it’s best to discuss with your partners the timeline for incorporation or LLC formation. Additionally, an experienced startup lawyer may also be able to provide insight into your decision. A successful attorney will have experience with many other businesses – and thus may be able to determine when is the perfect time to file for an LLC or corporation.
An LLC is a limited liability company. Along with the aforementioned liability benefits, the filing process for LLCs is much simpler than those of corporations. Additionally, LLCs are typically not regulated as strictly as corporations.
LLCs also provide a unique advantage in that they can choose how their business is taxed. LLC owners have the option to have the business taxed as a traditional C-corp or as a pass-through entity. The former is subject to double taxation – business income is taxed, and then shareholders are taxed again for any dividends on their personal tax returns. The latter allows business owners to pay business taxes on their personal tax returns.
A corporation also provides limited liability protection, but typically comes with more government regulation and more stringent filing requirements. This may include:
Corporations must continue to maintain and monitor these actions with verifiable paperwork in order to remain in good standing with the state.
It’s important to note that there are two different corporations to choose from: S-corps and C-corps.
C-Corps are the most common corporations. They have the traditional corporate structure that most are familiar with, including a board of directors, a set of corporate officers, and nearly unlimited shareholders. As previously mentioned, C-corps are subject to double taxation – on both corporate income tax and tax from dividends distributed to the shareholders.
S-Corps are less traditional, with a limited number of shareholders – usually 100 or fewer. These corporations enable pass-through taxation – all business income is reported on the owners’ personal tax returns, and there is no corporate income tax.
With all these considerations in mind, it can be incredibly difficult to choose which business entity is best for your needs. Ultimately, it comes down to compromise: while filing for a corporation may give you the structuring and business power to secure more funding and become more successful, it also comes with a large amount of maintenance in order to remain compliant with government standards.
On the flip side, filing as an LLC can provide you with the same limited liability protections – but if you are seeking growth as a business, it may be difficult to secure funding and investors.
Ultimately, you may need to consult the services of an experienced startup lawyer in order to make the choice. With years of experience representing all types of business, they may have the knowledge to understand what is best for you needs – and therefore counsel you on the best course of action for your business.
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