When you are building your startup from the ground, everything goes into making it successful. Choosing the right corporate structure may not seem like a top priority to many founders and entrepreneurs, but the reality is that the corporate structure you choose can have a significant impact on your startup’s future. The corporation vs. LLC debate needs to happen early in the life of your business, and it can be confusing for many first-time founders—especially with all the conflicting information about this topic that can be found on the Internet. An experienced startup lawyer can help guide you through the decisionmaking process, file the necessary paperwork and draft governance documents.
What’s the Difference Between a Corporation and an LLC?
When you want to limit your personal liability in your startup, formally incorporating as a corporation or an LLC is a good option for founders and entrepreneurs. The main difference between the two is that LLCs are unincorporated business entities. While similar in day-to-day operation, LLCs have much more operational flexibility and fewer required filings, whereas corporations are a much more rigid legal entity.
Considerations for Startups
Both corporate structures offer significant business advantages, as well as having some downsides. The following considerations can help you decide whether an LLC or a corporation is a better choice for your corporate structure.
Generally, LLCs and corporations are taxed quite differently. Unless you file for certain exemptions (like as an S-Corp), a corporation is a separate tax entity that will be taxed as such. An LLC, on the other hand, is a pass-through entity for federal taxes, so profits or losses are taxed via personal income taxes of the owners, avoiding the problem of double taxation.
A corporation is much more formally structured than an LLC. A corporation requires you to set up a board of directors, file annual reports, hold shareholders’ meetings, keep records of meeting minutes and other operational decisions and generally operate within a high level of regulatory compliance. An LLC, by contrast, operates under a customizable operating agreement. This means an LLC can be an easier choice in terms of business formality and structure, especially when the startup is in very early stages. If you are looking to make the business formality and obligations easier, an LLC can sometimes be a better option, if only because you have more control over the way it is set up.
An LLC is much easier to set up than a corporation. Incorporation documents for an S-Corp or a C-Corp require a much higher level of detail and must be filed with appropriate authorities. LLCs generally require much less paperwork. The formation can be fast and simple.
Investment and Stock
Only corporations can issue stocks. Technically, LLCs have membership interests instead. These do give members a share of ownership in the company, but there are more restrictions on how membership interests are transferred and priced. Generally, investors prefer to invest in corporations where they can be issued convertible preferred stock. If you are planning on raising venture capital, a corporation is generally a better option.
How Do I Know Which Is Right for Me?
Both corporations and LLCs offer benefits to early stage startups, just like they have their limitations. Ultimately, you have to decide how to balance the unique needs of your startup with the advantages and disadvantages that either business structure offers. Discussing the legal, financial, and secondary implications with an experienced startup lawyer is often the best way to make an educated decision that will set your company up for success.
The cost of forming a corporation or an LLC can vary dramatically. When you hire a lawyer in the Priori network, forming your corporation plus relevant governance documents typically costs anywhere from $300-$3500, while forming an LLC plus relevant governance documents typically costs $350-$5000. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
If I change my mind, is it difficult to restructure my company into another corporate structure?
You always have the option to restructure your business after you have chosen either an LLC or corporation. That said, it is not always an easy transformation, nor is it free of repercussions. It is usually better to simply choose a company structure that serves your long-term needs. If you are not sure which way to go, or worry that you have chosen poorly, consult a startup lawyer to discuss your options.