Inc. vs. LLC: Which legal
structure suits your business?
more to starting a business than coming up with a great idea, writing a business
plan and finding financing. A would-be small-business owner also must decide how
the business should be structured.
most chose between sole proprietor, partnership and incorporation (including its
small-business sibling, the S chapter corporation).
though, more business owners are choosing to go with another choice -- the limited
liability company. An LLC offers more legal protection than a partnership, but
retains the tax pass-through characteristics of a partnership.
the other choices, it has its pluses and minuses. Although individual circumstances
will affect your decision, here's a scorecard for each that should help you plot
"Most people think that LLCs are probably the wave of the future,"
says Mark Luscombe, principal analyst for the federal and state
tax group at CCH, an electronic
and print publisher of tax and business legal information. "It's
gradually supplanting other forms, except for companies that eventually
are interested in going public."
Advantages: LLCs, like corporations,
provide business owners with liability protection. That is, debtors
will go after company assets, not your personal assets. That's a
step up from partnerships and sole proprietorships when your personal
assets may be used to settle a business debt. Unlike corporations,
LLCs don't suffer from double-taxation, in which the corporate entity
is taxed and then its shareholders' dividends are taxed as well.
This benefit applies to LLCs that are classified as partnerships
for tax purposes. An LLC tax preparer simply checks a box on his
or her federal return to indicate how the organization will be taxed.
Some states' tax laws mirror the federal government's treatment
Earnings and losses pass through to the owners
and are included on their personal tax returns. There's also less
paperwork involved with running an LLC than a formal corporation:
"No year-end minutes, no notification of shareholders of meetings
and so on," says Dan Zabludowski, a partner with the law firm of
& Zabludowski, an LLC with offices in Coral Gables and Fort
Finally, LLCs are the most flexible when it
comes to organization. For example, there are fewer rules regarding
who can be a shareholder. They also tend to be more informally run
than a regular corporation.
Disadvantages: Tax liability for an LLC
varies by state. So if your company is going to operate in several
different states, you'll have to know how they treat LLCs before
electing to choose this type of corporate structure. An LLC also
can't go public, so if you're the owner of a dot-com that envisions
an initial public offering down the road, incorporation is a better
route to take. Otherwise, you'll have to switch your company from
being an LLC to being a corporation. That can add to the cost of
Lawyers, who are less familiar with the newer
LLCs than regular incorporation, also may charge more for helping
you form an LLC than another corporate structure.
The cost of launching an LLC also varies by
state. Some states charge more for a LLC than to incorporate, some
charge less and some charge the same rate regardless of what form
of corporate structure that you choose. A few states even charge
special annual fees for LLCs. Finally some states require two or
more partners for an LLC so if you're going into business solo,
this business format is not for you.
A new business can form a C corporation or an S corporation. According
to some press reports, the number of S corporations that are sprouting
is actually surpassing the formation of C corporations in part because
of the advantages inherent with S corporations. Most businesses
just starting out will opt for the S classification.
Advantages: Unlike LLCs, both S corporations
and C corporations can go public. For that reason, venture capital
companies prefer to work with corporations rather than with LLCs.
S corporations, like LLCs, don't suffer from double taxation. C
corporations may face double taxation, but they can have incentive
stock option plans.
Disadvantages of corporations: As mentioned
previously, C corporations face double-taxation, but S corporations
also have drawbacks. Their chief disadvantage is that the number
of shareholders that an S corporation can have is capped at 35,
according to Zabludowski.
Both S and C corporations require more ongoing paperwork than an
LLC. They must file articles of incorporation, hold directors' and
shareholders' meetings, keep corporate minutes and hold shareholder
votes on major corporate decisions.
Which is right for you?
Sitting down with your attorney and your accountant is probably
the best way to sort through the tax and organizational ramifications
and figure out what's right for your company. That said, there are
ways to cut corners.
If you feel competent, you can incorporate your
business or form an LLC on your own. It requires checking with your
state's corporate filing office (usually the Secretary of State
or the Corporations Commissioner) and filling out forms available
at the filing office or available from commercial publishers. For
business tax and licensing information about your state, go to Bankrate.com's
There are also Web sites such as Corporate
and Business Filings
that promise to make business formation a matter of filling in the
blanks. However, if you have any doubts or your business organizing
takes a complicated turn because you'll be selling stock, etc.,
don't go it alone -- enlist the aid of professionals. Filing incorporation
papers should cost between $200 and $1,000, depending on your state,
according to the Nolo Press, publisher of do-it-yourself legal guides.
You'll also need to check with federal and state
trademark registries to determine whether the name you've chosen
for your company is available. Business owners who are seeking to
incorporate will also have to complete corporate bylaws, which outline
when the annual shareholder meetings will be held, who can vote,
how shareholders will be informed if there's a need to additional
meetings, and so on.
Build a good foundation by selecting the right
structure for your company and your fledgling concern will get off
to a great start.
McCune is a contributing editor based in Montana
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e-mail bankrate editors.
-- Posted: Aug.