If you’re a business owner or real estate investors looking to limit your personal liability, forming a Limited Liability Company or a Corporation should be a top priority. There are many options to consider when structuring your company, so it is important to carefully evaluate your short term and long terms goals.
The Corporation
Corporations are often the entity of choice for large-scale or high-growth operations. Formed by filing Articles of Incorporation with the Secretary of State, a corporation is governed by its bylaws and splits power between three parties: (1) the shareholders, (2) the board of directors, and (3) the officers.
Among other essential information, bylaws will typically dictate how many directors the corporation has, the mechanics and minimum requirements of shareholder meetings, and the duties of officers. Although each of the parties has different roles and responsibilities, the collective goal remains the same: maximize profits for the shareholders.
Corporations are usually the best option if you’re considering institutional sources of capital investment in the future. A c-corporation, the default variant of a corporation, allows you to establish different classes of stock and provides you with the opportunity to “go public” and generate capital by selling shares of your stock to the public.
Still, there are a few disadvantages to creating a corporation. C-corporations are subject to “double taxation,” meaning they are taxed once by the IRS on their revenue, and then once again upon the distribution of dividends. And while corporations do offer significant flexibility in terms of raising capital, the primary purpose of a corporation will always be to generate the maximum profit for the shareholders, so understand that the actions of directors and officers will always be held to that directive.
The Limited Liability Company
In 1988, the IRS ruled that Limited Liability Companies shall be treated as a partnership for tax purposes despite maintaining the limited liability status of a corporation. The resulting boom in LLCs changed the landscape of American business significantly, and today, LLCs are one of the most popular business entities because of their flexibility, tax benefits, and limited liability.
To form an LLC, owners, called “members,” must file Articles of Organization with the Secretary of State and create an operating agreement. Each member owns “units” of the business rather than shares and must act in strict accordance with the operating agreement. And like the leadership of a corporation, members enjoy limited personal liability for all judgments, claims, and debts of the company.
LLCs are one of the most flexible ways to structure your business; they can be collectively run by the members, or the members may appoint a “manager” to handle the operations of the business. Because there is a lot of leeway for members to make decisions for the business, it is crucial that you cover any and all areas of potential conflict that may arise during the course of business in the operating agreement.
The biggest advantage LLCs have over other entities is pass-through taxation. With pass-through taxation, the LLC avoids paying taxes on revenue. Instead, the taxes are “passed-through” to the members, who individually file their own respective tax returns. The tax benefits of an LLC allow members to be creative and grow their business in a way that works best for them.
For example, let’s say you have a long-term goal of having a large publicly traded company, but you need a few years to establish the business first. In that case, it may make the most sense to capture the tax savings of an LLC until you are ready to take your company public. Then, once you are ready, you can always convert your LLC into a corporation.
Wondering if you should incorporate or need any help deciding how to best organize your company? Our office specializes in entity formation and corporate structures. We can work with you to build your company from the ground up by helping you choose an entity, drafting all relevant governing documents and agreements, and registering with the appropriate Secretary of State. Give us a call or fill out an online intake form today!
