If you are starting your own business and you are ready to set it up as a legal entity, you are likely considering a limited liability company (LLC) or a corporation. These are two very different entities, so it is essential to know the pros and cons of each in order to help you select which type of business entity is the right one for your company.
Both the LLC and corporation are formed by filing formation documents with the applicable state authority. They each afford the owners with protection from liability. In other words, owners of the entity are not typically personally liable for debts of the business in either a LLC or corporation.
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Limited Liability Companies
A LLC, while similar to a corporation, affords you more flexibility in managing your entity. It also offers flexibility in handling your taxes and it typically requires fewer record keeping requirements.
The owners of a LLC are called members, and each member owns a percentage of the business. There are typically restrictions on transferring membership interests in a LLC to other parties. For example, a member may be required to obtain the approval of other members prior to making a transfer. Additionally, if a member leaves, dies or files for bankruptcy protection, the LLC may need to be dissolved. This is a beneficial aspect of the LLC for small businesses who want to select their business partners and who do not require investors.
Corporations have existed for a long time. They provide your business with an established structure and the ability to transfer ownership shares, including outside investors.
The owners of a corporation are called shareholders. The corporate entity issues shares to its owners and each shareholder owns the number of shares that corresponds to the percentage of ownership the owner has. Thus, if the corporation issues 100 shares and you own 50% of the company, you should have 50 shares.
Corporate shares are also relatively simple to transfer from owners to other parties. A corporation can have a perpetual life, which means that if a shareholder leaves, dies or sells shares, it does not jeopardize the corporation’s existence.
The above are just a few of the pros and cons of LLC’s and corporations. If you are starting a new business and you need help selecting the right legal entity, contact us. Obtaining the right advice from the start can significantly increase the likelihood of your business being a success. Contact The Swenson Law Firm for help or download our free eBook with tips on Forming A Corporation.