So you’ve started a new business, congratulations! Here’s to the next step: legally recognizing your dream. If you’re looking to set up a liability cushion, chances are, you’re deciding between filing as a limited liability company (LLC) or a corporation.
1. Limited liability means if you go under, you don’t have to worry about the repo man.
This is a benefit you can reap from either an LLC or a corporation. You are not personally liable if you go bankrupt or get sued, provided you don’t do things like commingling your personal accounts with business accounts, don’t sign a contract or loan in your personal name and some other basic things.
Otherwise, actions you take properly in the name of the company will be shielded from your personal assets. So, you can rest a little easier at night knowing that you have protection that is not granted to sole proprietors or general partnerships.
2. If you’re not into rules or HATE paperwork, an LLC may be the way to go.
Corporations have Boards of Directors in addition to shareholders. So, that’s two levels of decision-making. An LLC can have managers, which are basically like directors in a corporation. But, LLCs do not need to have managers. They can be governed entirely by their members, which are equivalent to the shareholders in a corporation. That means no board meetings and no taking minutes. You can forget about a lot of the administration and procedures that are required to administer a corporation. There is still some paperwork, but it is less than with a corporation.
3. LLCs can be cheaper.
LLCs are sometimes less expensive to form and maintain than corporations, but different states have different requirements that affect the legal fees and filing costs.
With corporations, you will need to file a company tax return and you can avoid that with a sole member LLC, at least (with multi-member LLCs tat are taxed as partnerships, there is tax return requirement) so there could be an administrative cost savings when it comes time to file taxes.
The actual tax burden (what you pay Uncle Same) may be worse with a corporation than an LLC, which is usually taxed (owners can elect to tax an LLC in a few different ways) as a “pass-through entity,” meaning there is no entity-level tax. In a regular corporation (a “c-corporation”), there is an entity-level tax, which means there are two taxes — first on the income the corporation makes and, next on the income distributed to shareholders. Note that it’s possible to file an s-corporation election to change the default taxation of a corporation.
4. Looking for investors or a big stock option plan? If so, you probably want a corporation.
Maybe you’re looking to raise venture capital or any type of institutional financing. The structure of a corporation make them more attractive to investors and their wallets. This is because investors like the extra layer of decision-making (the Board of Directors) and they are familiar with corporations and how courts decide issues that relate to corporations. LLCs are a little newer (although they have been around since the 1970s) and the people with the money tend to make the rules and they like things that are familiar.
Plus, investors want to invest in companies that can “scale,” which means growing big quickly. Big companies often create equity compensation plans for their employees and some end up going public — both those things are the domain of corporations, not LLCs (LLCs don’t go public and, while they can have equity compensation plans, they are much more challenging to create and manage than corporate plans).
DISCLAIMER: This is general info. Know your own situation. It is always best to hire a lawyer for your specific issues. In the end, I am trying to help you, so don’t sue me.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.