Blog For Entrepreneurs
Must read article from the National Law Review on the benefit of having a small number of members of your Board of Directors: "Smaller boards tend to be “decisive, cohesive, and hands-on,”
Forming a startup can be a difficult decision that should not be made alone. It's vitally important that you consult with both a business attorney and accountant before making such decisions. I include accountants as part of this decision making process because tax rules are a primary driver to what will be the most advantageous formation solution for your business.
With that in mind, the following sets forth the main differences among C corporations, S corporations, and limited liability companies:
While corporations provide limitation of liability for their shareholders, they are subject to double taxation (i.e. the corporation is taxed on profits and then the shareholders are taxed on amounts distributed to them). On the flip side, if you are seeking financing from venture capitalists, you may very well need to form as a C-corporation as institutional VCs prefer investing in C-corporations.
LLCs provide limitation of liability like a C-corporation. Many LLCs are taxed as a partnership and are considered disregarded entities (i.e. the LLC is not taxed on profits, but the shareholders are taxed on the distributions they received from the LLC). LLCs may elect to be taxed as a partnership, as a C corporation, or as an S corporation. When people refer to the tax treatment of LLCs, they usually mean an LLC that has elected to be taxed as a partnership. Taxed as a partnership, the LLC is a “pass-through entity” that is not taxed.
An S-coroporation provides limitation of liability like a C-corporation. An S-corporation is an election filed with the IRS, not a form of entity. LLCs, as well as corporations can be taxed as an S-corporation. Like an LLC taxed as a partnership, an S corporation is a pass though entity with a single layer of tax. A main difference between S-corporation taxation and partnership taxation is that the distributions received by LLC members who assist in running the business are subject to self-employment tax. With S-corporations, shareholders can reduce employment taxes by taking part of their income in salary (and paying employment taxes) and taking the rest of their income as a distribution.
This is just a brief example of the differences. Other rules not mentioned here may apply to you and your business. Feel free to contact us for a free consultation.
Great article about how crucial it is for entrepreneurs to build the right team for their startup beyond the founders.
