The time has come to form a legal entity for your new business. What’s going to be the best legal structure for your startup? Will it be a corporation or an LLC? In this article, we take a quick look at both options starting with an LLC.
What’s an LLC?
LLC is the acronym for limited liability company. The limited liability is attractive to business owners, and investors as only the money they have invested and business assets are available to settle debts and liabilities.
LLCs are often compared to Partnerships. The main difference between them is with a partnership is there is a personal liability with a partnership. See this article on what distinguishes a partnership from LLC or a Corporation.
Did you know there are legal and tax entities? For a detailed explanation, mycorporation has the topic covered.
While an LLC may be taxed like a corporation, it is not a corporate entity. Therefore, there is generally no need to have shareholders meetings. LLCs also don’t actually pay tax. LLC profit is passed to the members and recorded on their individual tax returns.
Most small business owners choose an LLC instead of a true corporation. However, let’s look at the Corporation entity.
What Are the Benefits of a Corporation?
From a customer viewpoint, one of the key benefits of starting a corporation is that it adds a degree of legitimacy to the business and is expected to be successful and around for the long haul. The corporation is a tax entity, so it pays a corporate tax on profit and tax on dividend payments to shareholders.
What is a C Corporation and an S Corporation? See this article.
Corporations may also have the added benefit of having different classes of shareholders and this may make it easier to raise funds without having to necessarily cede power.
It May Be Easier to Sell a Corporation
While there may be a variety of tax and other consequences when selling a corporation, most attorneys and other relevant professionals are familiar with those rules. Therefore, it may be easier to provide advice as to how to structure a deal.
Furthermore, buyers may be more inclined to purchase a corporate entity than an LLC because of its ownership structure.
How Do You Decide Which One Is Right for You?
As with anything relating to business, it is important to look at as much data as possible when making a decision.
Professionals such as doctors or dentists may benefit from an LLC as they may be more concerned with limiting their liability.
However, small businesses that profit may want to be a corporate entity as it may allow for greater flexibility from a tax and financial standpoint.
LLCs are also ideal for those looking to hold real estate or other assets outside of their estate. It, therefore, may be a good idea to talk with lawyers, get a referral or do a ‘search’ on ‘specialist business law lawyers’ and then follow up with due diligence.
Starting a business may make it easier to gain control over your career and disrupt the market at the same time. Whether you choose to go with an LLC or a corporate entity, make sure that you understand what each structure is and the pros and cons of using it.