When starting a new business, getting the structure right is extremely important, and can impact the long-term success of the business. A business can be a sole proprietorship, partnership, Limited Liability Company, or Corporation. Within each of these general types there are many subtypes (limited liability partnership, S-Corp, C-Corp, etc.), but before you can consider them, you need to first decide what structure works best for you. Generally, those who are best served as a partnership or sole proprietorship will know that as we did at Sterling Heights Photo Booth, as they are uniquely different from the others. With LLCs and Corporations, however, there are many similarities which can make it confusing as to which is right for you.
But when thinking about forming either a Corporation or LLC, what you want to think about is the ownership structure and future aspirations. With a Corporation, there are shares of ownership established. First as a private company, then one day, should the company grow to a size that it makes sense, as a public company. LLCs, on the other hand, do not have shares and, as such, can never be a publicly traded company. Instead, LLCs have members. These members each own a percent of the company, however, there can be restrictions on who, or what can be a member of the LLC. This can cause problems later on, should you try to take on investors, as many times venture capital groups cannot, or will not, be a part of LLCs. They opt for the simplicity of shares in a C-Corp. So for a company which plans to expand, and may take on additional partners or goes public, the Corporation is probably the better structure.
But the Corporation route involves far more paperwork than LLC and can be more heavily taxed. LLCs allow pass-through income, meaning the income from the LLC is passed directly to the owners and is not taxed at the LLC level. With C-Corps, there will be taxes at the corporate level first, then taxes again at the personal level. This effectively creates double taxation on business earnings. This can be avoided to some degree through an S-Corp, however, those have limits on employees and are limited to one owner, negating the earlier advantages of the Corporate structure.
In the end, LLCs seem better suited for small businesses which do not intend to take on partners or go public, as they are more tax-effective and have less stringent filing requirements and annual renewals. Corporations, specifically C-Corps, generally work better for those who are looking to eventually bring on partners or think their business may one day go public. But before you do anything, it’s a good idea to consult a business tax advisor or a business lawyer to help you understand the pros and cons of each structure for your business.
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