Maybe you’re a brand-new entrepreneur looking to legitimize your small business. Perhaps you’ve already incorporated as a sole proprietorship and want to switch to a new entity. Whatever your situation may be, you’re likely looking at forming a limited liability company (LLC), corporation or partnership for your company. What are the pros and cons of doing so? Our primer explores more about what forming these entities means for your start-up.
Pros: As one of the most popular legal formations, limited liability companies are flexible and allow you to separate and protect your personal assets from that of the business. For businesses in fields like construction, where the conditions are hazardous, having this kind of legal protection is a necessity. There are also tax benefits to incorporating as an LLC. With a limited liability company, you have the ability to choose between an S corporation and C corporation for your tax entity. If your company qualifies as an S corporation, you can use careful planning to avoid paying significant employment taxes.
Cons: It’s a little more paperwork to file as an LLC than it would be if your business wasn’t incorporated, but that’s worth taking on if it means your business receives extra liability protection. LLCs are also not public structures, which is something to keep in mind if you want to take your company public. But if business begins to take off, you can switch it to a public legal entity like a C corporation down the road.
Pros: As the name implies, this particular entity is your best bet if you’re opening up a business with a partner, like a friend or family member. Within this structure, you can share profits and losses as well as make decisions together. It should be noted, however, that all decisions made must have the express consent of all partners.
Cons: While you may need everyone to agree on decisions before they are fully made, entrepreneurs in a partnership are also held liable for all decisions, including actions of the other business partner(s). Think and talk everything out carefully before moving forward.
Pros: Much like LLCs, corporations also allow for the separation of personal and professional assets. This legal formation offers a formal business structure that potential investors can invest capital in, if you are looking to accept or raise money from outside investors. Corporations also have the ability to issue shares and reduce potential audit risk. It’s important to note C corporations are required if you’re planning to use 401(k) business financing to capitalize your business.
Cons: Businesses with big plans to expand on an international level or even beyond more than one storefront will be perfectly at home with this entity while smaller companies, like Etsy shops or small websites, may not feel like it’s the best fit. Consider the future of your business and how it may expand before deciding if this entity is the right one.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @deborahsweeney and @mycorporation.