When you decide to start a business one of the first things you must decide is what legal structure your business will utilize. There are many different choices for legal entity and even some special ones if you are a certain kind of business.
The 2 most popular are the LLC (limited liability company) and the corporation.
In this article I breakdown each and then will share which I think is best for small business.
The Corporation is the original limited liability entity and is the go-to for large publicly traded companies.
A corporation consists of several layers. The shareholders (owners of stock) elect a Board of Directors to oversee the business. The Board of Directors then hires a Chief Executive Officer (CEO) and other officers to manage the day-to-day of the business.
In a small business it is often 1 person being the only shareholder, the entire board, and the CEO.
Corporations often times have to comply with complicated requirements for board meetings, record keeping, and annual filings.
When forming a corporation, decisions must be made about how many shares of stock the company will authorize, how many shares of stock the company will issue, stock issuance agreements, and actually giving stock certificates to owners.
As you can see, corporations can get complicated.
The limited liability company (LLC) on the other hand is simple with great flexibility, which is why it has become the go to for small business.
The LLC can be streamlined where the owners run the day-to-day of the business (called “Member-Managed”) or have layers where the owners are removed from daily operations like a corporation (called “Manager-Managed”). This is all decided in your company’s rulebook, the Operating Agreement. Every business situation is different, and the LLC is flexible enough to handle them all.
The LLC is also flexible in that you can choose the default tax rules for LLCs or to be taxed like an S-corp or even a C-corp. The LLC can really handle anything you want to do with your business, and it can change with you as your business grows.
Most of the small businesses we work with are best served by being an LLC. The few exceptions are high-growth start-ups that are looking to immediately take on Venture Capital investors who demand that the company be a corporation.