1. Liability
Protection: Both an LLC and corporation
insulate the owners from the company’s debts and obligations provided that the
formalities are followed. This
liability protection often is a chief reason to move beyond a sole
proprietorship. (I previously circulated
a memo on avoiding personal liability.
Please contact me if you would like a copy.)
2. Tax
Treatment: An LLC and an “S corporation”
(a corporation that has elected to be taxed as a partnership) are both treated
as pass-through entities for federal tax purposes. That is, the tax occurs at the member or
shareholder level, avoiding a double tax that would otherwise occur at the
corporate level, such as for a “C corporation". On the State level, Massachusetts imposes a
minimum tax on S corporations as well as a separate tax if total receipts exceed
a threshold (in 2012, $6 million or more).
(Keep in mind that tax law is complicated and the comments
above are simply general guidance. Specific tax advice is needed for each
business.)
3. Who Are the
Owners: An S corporation may have
restrictions on the number and types of owners, whereas an LLC may provide more
flexibility. This may be a concern if
there are corporate owners or many of them.
4. Management
and Control: An LLC may be either
manager-managed or member-managed, whereas an S corporation is governed by its
board of directors as elected by the shareholders, with operations handled by
the officers. An LLC can provide
flexibility insofar as a manager(s) can be delegated broad authority in the
Operating Agreement to run day-to-day operations as well as take more
significant actions, with members reserving control over certain significant
decisions.
5. The Business
Plan: A relatively straightforward,
stand-alone business may use either form.
If various businesses are contemplated, each organized as its own
entity, multiple tiers of LLCs or corporations may be used, and series LLCs may
allow setting up multiple businesses within one LLC. The consideration is to shelter each business
from the liabilities of each other business.
6. The
Contributions and Rights of the Respective Owners: Consideration is given to owners who may make
different contributions (e.g., cash, services, property) or may be active
participants or passive investors, or if distributions of cash are to be made
on other than a pro rata basis. LLCs may allow different and flexible
distributions of cash and corporations may allow for priority distributions
through the use of preferred stock.
7. Financing
and Capital Structure: If the financing
will be relatively straightforward, either entity may work. However, outside financing from angel or
venture capital investors may dictate the choice of entity.
8. Employee
Compensation: Either entity may work for
standard compensation plans. Stock
options may favor a corporate form, although an LLC can be structured to provide
analogous interests.
9. Filing
Fees: The original and annual filing
fees in Massachusetts are slightly lower for corporations than LLCs.
These are just some of the considerations. Please do not consider them “legal advice”
because the specific details of each business should be discussed with
experienced counsel.
Please contact me if you or a colleague has any questions
regarding forming an LLC or corporation or other business matter. Please forward or share this post or blog with a
colleague if you would like.
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