Business Structure LLC or INC?

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Permalink Reply by Team Sta.rtUp.biz on September 8, 2008 at 8:51pm

There isn’t a black & white answer when it comes to choosing a form for your business, as the answer depends on a number of factors including the state laws of your state, your personal and business tax situation, and how you want to structure your relationship with your future partner. That said, at least in the beginning, many small businesses choose to form an LLC. Here are some of the pros and cons of the 2 categories you mentioned (LLC, and INC – which can be either an S Corporation or a C Corporation):

LLC:
Advantages:
-inexpensive to form
-simple corporate governance rules
-flexibility including allowing for profits to be distributed unequally
-allows for pass-through taxation (or may elect corporate taxation)
-ideal for small businesses on limited budgets

Disadvantages:
-state laws and taxes applied to LLCs vary
-you may be limited in the amount of owners you may have

S Corporation:
Advantages:
-allows for pass-through taxation

Disadvantages:
-limits number of owners
-does not allow for flexibility to distribute profits unequally
-state corporate taxes

C Corporation:
Advantages:
-best form if planning on investors (including foreign investors, corporations, venture capital fund and from angel investors)
-best form if may go public

Disadvantages:
-“double taxation”: the corporation is taxed at the corporate level, and then the shareholders are taxed on dividends they receive

Good luck to you.

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Permalink Reply by Robert Johnson on September 11, 2008 at 12:23pm

Michelle,
Every situation is a bit different and thus there is no one answer that fits all. An LLC can be a nice way to begin - especially if the business will be realtively small for a period of time and you don't expect to have a lot of employees right away.

The corporation structure is more common, has a long history of legal precedence and therefore is more "comfortable" for investors - especially if the exit strategy is an IPO. However, the LLC offers much more flexability - so one can create some "interesting" opportunities for early participants.

FYI -it is much easier to change from an LLC to a Corporation than the other way.

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