Three fundamental legal business structures are typically used to form a business. One of the most common question asked by start-ups is, “which one is best for me?” Without getting into all the variations or too much legalese, here are the differences. Not to be too obvious, but the point of incorporating is to protect you and your shareholder’s personal assets. All three of these forms will do that, so the decision comes down to some other variables. Knowing why you are starting a business and having an idea of what your exit strategy is may be a starting point for making your decision on type of entity you form. Here are the fundamental three:
C-CORPORATION C-Corporations can issue multiple classes of stock, something that investors are keen on, since they can get preferred shares that represent special rights and benefits. C-Corporations are also the choice if you plan on selling stock publicly. If part of your business plan is to attract venture capital and/or go public, this is the strength of the C-Corp.
S-CORPORATION It’s possible that S-Corporations could help the owners reduce their self-employment tax liability and this is a big draw. S-Corporations are limited to 100 partners, and they can only issue one class of stock. They also cannot issue publicly traded stock. This is good for lifestyle businesses and businesses with a growth strategy and exit plan that doesn’t include professional venture capitalist or publicly traded shares.
The LIMITED LIABILITY COMPANY (LLC) The draw of the LLC is its simplicity. It is quite a bet less formal and doesn’t have all the regulatory reporting requirements of the S and the C structures. The LLC structure “passes through” taxes to the individual owners, so the company does not pay taxes. Instead, the shareholders pay taxes at their individual tax rates. By incorporating each of your businesses as a separate LLC, you get the benefits of having a corporate shield over your business to protect your personal assets. In case any of your businesses gets sued, the judgment cannot go against your personal savings, retirement, home, or college fund for your kids. Keep in mind that can change your corporate entity type down the road with additional fees to the government, of course. Better to select the right one out of the gate. -Peter Muzinich