Starting up your business and looking for a viable entity choice? LLC or Corporation? We know it can be a bumpy ride…but never fear, Rubicon is here to smooth out the process. Once you determine and set up the best entity choice for your company, you’ll be off to the races. Hold on to the handlebars!
Please note that this article only considers the most common entity choices for startups, LLCs and Corporations, but there are other options for your business pursuit. First things first, here’s a general breakdown of each entity choice characteristics. Keep scrolling for more information.
- Single taxation is also known as flow-through taxation, where a company bypasses taxation at the entity level and passes the full tax expenses to its shareholders to avoid “double taxation” at the entity and shareholder level. This allows for more retained earnings on the income statement / balance sheet.
- An LLC can elect for S-Corp tax status (flow-through / single taxation) by filing IRS Form 8832.
- The S-Corp would convert to a C-Corp to go public because it will inevitably exceed the maximum required amount and type of investors.
What are the similarities between the three most common startup entity structures?
- Limited Liability. All of these legal entities have limited personal liability; meaning the only thing you are liable for is the personal capital contributions you put into the company.
- Reports, fees, and administrative obligations. All three entity choices are subject to state reports, filing fees, and administrative obligations dependent on the specific secretary of state requirements.
- Fiduciary duties. Members, managers, directors, whomever governs the entity will be subject to fiduciary duties. Depending on the state of incorporation, these fiduciary duties can be reasonably waived in the articles of incorporation or operating agreement.
These entity structures have substantive differences. Here are some of the most important:
- Taxes. Both S-Corps and LLCs (if you “check the box”) are subject to single taxation (shareholders). C-Corps are always subject to double taxation (entity + shareholders).
- Flexibility in management. Whereas, LLCs have flexibility in governance structure: membership-managed or manager-managed, an S-Corp and C-Corp will always have a Board of Directors and formal corporate governance structure.
- Limitless shareholders. Only C-Corps and LLCs allow for a limitless number of shareholders and very creative class structures. On the other hand, S-Corps can major restrictions on shareholder type, amount, and allow for only one class structure with the same rights. Learn more about S-Corp tax and equity restrictions here.
Ready to form your entity? We hope this blog post provided a foundation for you to grow from. Of course, we recommend you consult with a business lawyer to best understand the entity choice that suites your startup. It is important to form your limited liability entity early on. Click here for more information!