LLC or corporation: choosing a structure for your business

Every new business faces the same early question: what kind of company should this be? The answer affects tax, personal liability, the ability to raise money and how easy it is to exit. There is no single correct choice, but the main options are easy to compare.

The limited liability company

An LLC separates the owners' personal assets from the debts of the business in most circumstances, and is flexible. By default it is taxed on a pass-through basis, meaning profits are reported on the owners' own returns. Its rules are set by an operating agreement, which is where most of the important decisions are recorded.

The corporation

A corporation is a separate taxpayer with shareholders, directors and officers. A C corporation pays tax at the entity level, and shareholders pay tax again on dividends. An S corporation elects pass-through treatment but is subject to restrictions on the number and type of shareholders, and on classes of stock.

• Venture investors generally expect a C corporation, usually incorporated in Delaware.
• Owner-managed businesses often start as LLCs for simplicity and flexibility.
• An LLC can elect to be taxed as an S corporation, which may reduce self-employment tax in some cases.

Questions to ask before you choose

Consider who will own the business and whether ownership will change, whether you plan to seek outside investment, how profit will be shared, and what happens if an owner leaves or dies. If the answers are unclear, that is a reason to talk to both a lawyer and an accountant before you file.

Do not skip the agreement

Whatever structure you choose, put the arrangements between owners in writing. Disputes between co-owners are among the most common and most expensive business conflicts, and a clear agreement reached early is the cheapest protection available.