Should I form an LLC or a corporation?
Fairly frequently, an individual will ask me whether he should form a limited liability company (LLC) or corporation for his business. Here are the factors that I typically find are most important.
First, we can pretty much dismiss income tax considerations. While by default, an LLC is not taxed as a separate entity but a corporation is taxed separately, there are ways to override the default tax treatments. An LLC may elect to be taxed as a separate entity by filing IRS Form 8832. Subject to certain limitations, a corporation can avoid separate taxation (i.e., can become an “S corporation”) by filing IRS Form 2553.
The following are the factors that, in my experience, are most likely to lead an entrepreneur to form a corporation rather than an LLC:
- An expectation that outside funding will be sought, especially from institutional investors (venture capitalists, in particular, tend to invest only in corporations).
- A desire to offer tax-advantageous equity ownership interests to employees and independent contractors (more straightforward to accomplish with a corporation than with an LLC).
- Prospective customers may feel that a corporation is more substantial and more “real” than an LLC (marketing and sales consideration).
The most significant disadvantage of a corporation is compliance-related overhead: The need to conduct annual shareholder meetings and regular board meetings and to prepare and file minutes for those meetings.
So what I have seen among my clients is: If none of the pro-corporation factors described above is present, the client forms an LLC to avoid the expense and effort associated with compliance-related tasks.
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This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.