Establishing a startup (Inc or LLC) is a dream come true for most of us. Being able to create your own business and seeing it blossom is amazing for sure, and it does bring in front some really impressive results all the time. It certainly helps and it delivers a unique experience. That being said, finding the right business type you can go with can be a bit of a nuisance. And that’s because not all business types will be able to work for you. The idea is to know what you are getting into and actively figure out a way to make this work properly.
Inc or LLC
Here you can see a list with each type of business you can create. Based on this you will find it easy to figure out what type of company you should create, which is extremely important to consider at this time. It’s a great thing to focus on and it will totally be worth it if you know what you are getting into.
What is an LLC?
Having an LCC is great because you will have liability protection and all the benefits. You can have a single owner or an unlimited number of owners. On top of that, you will also notice that there’s no need to elect the board. You don’t have to buy and trade stocks for the ownership percentage here. The LLC is a business entity, you still need to hold annual meetings. But you don’t have to handle a large amount of legal documentation and financial reports that a corporation needs to do.
The entity members here can choose the taxation method. There’s flexibility because you can be taxed as any taxation structure and then you will apply that to the LLC. Another great benefit in all of this is that every LLC member can receive write-offs larger than the ownership percentage. Basically you can split the loss or profit equally when the financial planner says it will help all parties. That makes a huge difference and you will appreciate the tremendous results coming from all of this. You get to see an improvement and at the end that can be extremely helpful no matter the situation.
There are downsides with an LLC structure too. The compliance fees and state renewal are a bit on the expensive side, which might become a problem. In some counties when you are an LLC you have to pay an extra fee, capital values tax or franchise and excise tax. And in addition, investors will find it harder to bring capital to the company, which is very tricky.
The C-corp is a legal entity that will shield the owners from company debt and any personal liability. That’s important because being a sole proprietor, for example, will not be giving you all of that. You can have 100 or even hundreds of shareholders as you exchange stocks. The shareholders can select the board of directors and the president, CFO, and CEO. The C-corp helps lower the shareholder and company tax liabilities. They do that due to the fringe benefit items that can be tax-deductible.
On top of that, a shareholder can offer and also use any medical reimbursement plans. You can also take advantage of fringe benefits that are all tax-free. If you travel a lot or if you need to handle entertainment costs for the business, these will be tax-free, and that helps save a whole lot of money very quickly. And if you use this type of setup, you can attract more investors this way. The shareholders can ask investors for a lot of money and it’s easier to handle such a thing.
Are there downsides if you choose to have a C-corp? Yes, and this mostly comes from the very complex reporting and the stock trading requirements. The government bodies have to abide by the corporate by-laws and keep track of all the stocks. And since the C-corp can have tons of stock transactions, that can be rather challenging. While there are tax advantages, you will have double-taxation many times. That on its own, combined with the legal hassle makes this not a very appealing type of business for newer entrepreneurs that want something very simple.
The S Corporation is restricted to only 100 shareholders at most. This is a difference when compared to the C Corporation for example. If you check it out, this looks similar to the C Corporation, but here you don’t have the double taxation. In order to do that, the S Corporation passes all the profits and losses to the shareholders and the company doesn’t have to deal with that. They can’t attract venture capitalists, but S Corporations will be able to acquire investors and transfer or sell the corporate stocks. The investor buy-ins are bringing in good growth, which is better than any individually run company for example.
When it comes to S Corporation downsides, the owners will have to file and maintain any state documents, something that can become very challenging to do on your own. There are restrictions such as using a single class of stock, but the stock can have a variety of voting rights, so you need to keep that in mind. The S Corporation also requires the officers and shareholders to have a reasonable salary even if the company is not making any profit. So if you choose this type of business venture, it can be a bit challenging if you’re not making any money.
Which is the best? S Corp vs C Corp
Most people go with an LLC because it’s easier to establish, but at the end of the day, each one of these options comes with its pros and cons. The idea is to understand all the benefits and downsides related to them and adapt to the situation. Once you read our pros and cons above you will find it a lot easier to assess every offer and see what works for you and what can be improved. Take your time and don’t rush, this is a very important decision for your business!