If you’re a business owner looking to limit your personal liability, how do you know which entity is right for you? While there are many entities to choose from these days, including various forms of limited-liability partnerships, in most cases the two entities of choice are still a corporation or a limited liability company (LLC).
For most small businesses, the relative flexibility and simplicity of an LLC makes it the logical choice.
Compared to corporations, LLCs are generally subject to fewer formalities, such as record-keeping and meeting requirements. LLCs also allow greater flexibility in the structure of management and in the method of distributing profits and losses to the owners.
In addition, LLCs are almost always the entity of choice for small businesses that own property likely to appreciate in value over time, such as real estate. In part, that’s because regular corporations (also known as c-corporations) are generally double taxed on appreciated value, both at the corporate level and at the shareholder level, whereas LLCs don’t themselves pay income taxes but instead pass their entire tax liability through to their members. Owners of riskier income-producing property, like rental properties, also typically choose LLCs because they provide an extra charging order layer of protection from potential judgment creditors.
Although an LLC is often the better choice for the reasons stated above, that’s not always the case. Other factors sometimes tip the scales in favor of a corporation. Such factors may include the number of investors in the business, whether the business intends to raise money from the public, professional restrictions that sometimes preclude doing business as an LLC, the extent to which the company desires to provide fringe benefits to its owners or incentives to its employees (such as insurance or stock options), and whether the company can qualify as an s-corporation and thereby potentially save payroll taxes.
To decide which entity is right for you, consult a qualified business attorney.