If you have your own business or you are starting a new company, you may be wondering if you should form a legal entity. The quick answer to this question is usually “yes.” There are several different types of legal structures to consider, each with having its own pros and cons. This blog will focus on limited liability companies, C-corporations and S-corporations.
Limited Liability Company (LLC)
A limited liability company (LLC) is a popular choice for many small or new businesses because it is a cross between a partnership and a corporation. The members of an LLC own and manage the business jointly. The LLC structure allows the members to share in the business’s profits and losses, which can be allocated disproportionately among the owners. Similar to a partnership, the LLC members enjoy pass-through tax treatment.
Similar to a corporation, an LLC is its own, separate legal entity. This is important because it provides limited liability to the owners and protects their personal assets in most lawsuits. However, the protection is limited because in certain situations, such as if fraud has occurred, the members can be held liable
A C-Corp is a more complex and expensive legal structure. It requires a significant amount of record-keeping and compliance obligations, but it also offers many advantages. A C-Corp is not a pass-through entity for tax purposes, so the entity is taxed separately. Thus, owners are only responsible for paying taxes on money they receive from the entity. The C-Corp structure allows you to create different classes of stock, which means owners can have differing shares with a variety of rights and obligations. This is important for businesses that need to be able to do fundraising to pay the start-up costs and other expenses.
The S-Corp has many of the same benefits as the corporation. However, the S-Corp is a pass-through entity for tax purposes. Thus, its profits and losses flow directly through the entity to the individual shareholders. The S-Corp is limited to 100 investors, all of which must be individuals and legal residents of the United States. If necessary, a S-Corp can be converted to a C-Corp later on. It shares characteristics of the LLC and the C-Corp.
There are many tax and non-tax reasons to consider forming one entity over another. There is no one-size fits all pattern. Expert help is needed to make these decisions.
Don’t put your business in jeopardy by not selecting the most beneficial legal structure available. The Astill Law Office has provided high quality legal services for over 30 years. We specialize in business formation, wills, trusts, estate planning, and asset protection. If you have any questions about creating a Trust, Will, or estate planning in general, contact The Astill Law Office at 801-438-8698.