Starting a Business? Understand Your Entity Options

The prospect of starting a business is incredibly exciting for most people. The independence, the control, the promise of building something yourself from the ground up, and the thrilling risk and challenges inherent in the process are all factors that make this such an appealing route.

But where do you begin?

One of the most important steps any prospective business owner needs to take when starting a company is understanding his or her options with regard to choosing a business entity for the fledgling company.

Some of the smallest startups may elect to begin as a sole proprietorship, the simplest form of business structure. However, this can be quite risky as there will be no personal liability protection for the owners since sole proprietorships are not considered separate legal entities from the owner.

Instead, a majority of startups should look into forming as either a Limited Liability Corporation (LLC) or an S-Corporation. Both of these structures provide limited liability protection for the owners when it comes to debts and other liabilities, particularly with regard to potential lawsuits.

While there are other business entity choices, such as the C-Corporation, most startups elect to choose between an LLC or S-Corp for a number of reasons.

Most experienced business owners will tell you that you should try to keep things simple when your company is just getting started, and both LLCs and S-Corps provide high ease of use. They are quite easy to start, with minimal startup fees and simple registration requirements.

There are also far fewer formalities for LLCs and S-Corps compared to a C-Corp, meaning fewer restrictions and requirements regarding things like ownership and reporting.

While C-Corps are highly structured, LLCs and S-Corps have the flexibility to be creative with how they build their company, allowing owners to start a business that is uniquely theirs.

Affordable taxation is perhaps the biggest reason startups elect to structure themselves as LLCs or S-Corps. Both entities have what is known as “pass-through taxation.” This means the company’s taxes pass through to the owners’ own personal taxes, rather than facing the “double taxation” of a C-Corp where the company is taxed as its own entity, and then the owner is taxed again on his or her personal taxes for the business.

Finally, LLCs and S-Corps provide owners with much easier exit capabilities. Selling or leaving a C-Corporation is generally quite complex due to numerous corporate formalities. It is far simpler for owners to sell or exit the business when it is structured as an LLC or S-Corp.

There are a few key differences between LLCs and S-Corps. While the formalities and restrictions placed on S-Corps are far less strict than those of a C-Corp, they are more intensive than an LLC. S-Corps must still keep meeting minutes, keep other appropriate records, and have a board of directors and company officers in order to maintain liability protection. LLCs have no such requirements.

S-Corps also have more limits on ownership than LLCs, and must distribute income equally amongst owners, while LLCs may distribute profits disproportionately.

If you are interested in starting your business as an LLC or S-Corp, a skilled business attorney such as those at the business and bankruptcy law office of Maxwell Dunn can help you analyze your options and select the best structure for your needs and goals. Give us a call today.