Deciding on a legal business entity is not a simple task. There are a number of considerations to make, and each weighs separately according to the type of business in question, its growth prospects, financial structure, and regulatory or tax obligations. The decision should never be made lightly. However, most startups tend to file as either limited liability companies (LLC's) or corporations. For that reason, let's look at the basic distinctions between these two entities.
LLC's
The point of any business entity is to provide business owners and principals with asset protection. That means their personal capital cannot be tapped in the event of legal intervention. There are several other benefits regarding taxation, corporate ownership, and regulatory compliance.
LLC's combine the asset protection of a corporation with the autonomy of a sole proprietorship or partnership. Furthermore, unlike corporations, LLC's are legally permitted to have an unlimited number of shareholders.
â¨"In an LLC, income and loss can be allocated disproportionately among the owners," writes Nellie Akalp for Mashable. "By contrast, in the S Corp, income and loss are assigned to each shareholder strictly based on their pro-rata shares of ownership."
The general rule of thumb is that LLC's involves less bureaucratic red tape than their corporate counterparts. Really, the main structural obligation of an LLC is to draft an informal operation agreement.
So what are the benefits of a corporation?
Corporations
Most entrepreneurs, particularly solo ventures, agree that corporate filing is too troublesome. This is because most corporations need to establish a board of directors, file annual reports, hold shareholder meetings, keep record of the minutes, as a well as a number of other tasks.
But for startups with considerable growth potential, a corporate filing may ultimately become necessary. This is mainly because of the financial and investment perks. Depending on whether your business files as an S or C Corporation, you may attract a larger number of shareholders (S Corporations cannot have more than 100). Also, investors - including lenders, angels, and venture capitalists - are more likely to be interested in a corporation than an LLC.
"If your company is considering raising venture capital down the road, VC firms will most likely choose the C Corporation as the type of legal entity for their investments," Akalp adds. "This doesn't necessarily mean your business needs to start as a C Corp, but be advised … you will need to convert the business to a C Corp (if your state allows conversions) at some point."
Tags : LLC, S Corp, C Corp, corporate books, corporate minutes, operating agreement
Posted: Feb 21st, 2012