Choosing the Right Structrure for Your Business

The first question to ask yourself is "what are my long term plans?" Is your goal to create a company that will grow and then go public, or be sold to a larger company for millions of dollars, or do you intend to run a small family business where you, members of your family, and perhaps a few trusted associates will be involved? Will you operate primarily in your home state, or will your focus be national or international? These questions are critical in deciding how to organize your new business. For example, if your goal is to be acquired or go public, you probably want to create a "C corp." If you and a few friends or family members are creating a business that will not expand, at least in terms of owners, an LLC may be perfect. On the other hand, you may want the formalities and/or the tax advantages of a Subchapter S corporation.

LLC's and corporations both insulate the owners from liability. An LLC has "members" rather than shareholders. The members can run the company or have one or more "managing members" do so. The LLC is an excellent tool for holding rental property--I recommend that each building be held by a separate LLC so that any liability is limited to that building. If your company is going to have only a few owners or members, an LLC may be ideal. The paperwork is somewhat simpler than a corporation (though many states allow "close corporations" in which the shareholders run the organization just like members of an LLC). The LLC is usually a good substitute for a sole proprietorship. Note that all income from the LLC will be treated as ordinary income and subject to FICA and income tax. Although you can elect to have an LLC taxed as a corporation, generally the LLC is taxed like a partnership or sole proprietorship and profits are distributed to the members and taxed as ordinary income.

A C Corporation is a garden variety corporation with no limits on the number of shareholders it can have. If you want to grow your shareholders and maybe go public or be acquired, a C Corporation is generally the best choice. The local XYZ Store can be a C Corp, and IBM is a C corp. When creating a C Corporation, you will need guidance on how many shares to authorize and how many shares to issue. This is true for both a C corporation and a Subchapter S corporation.

If you create a corporation, you may file a Form 2553 with the IRS asking to be treated as a Subchapter S Corporation. In order to qualify, the number of shareholders must be limited and no shareholder can be a corporation. The advantage of the Subchapter S Corporation is that profits or losses are passed directly to the shareholders and the corporation itself is not taxed. With a Subchapter S, you can pay yourself a salary but distribute some profits as dividends, possibly avoiding self employment tax (Social Security) of 15.3% on some income.

Generally speaking, you can organize your business in any state where you have an actual presence. That can be the state where you live or it can be a state where you have an office. Many companies organize in Delaware, because Delaware does not require companies to have a physical office in Delaware. You can have your registered agent there serve as your office. There are three things to consider: First, where do you have a physical presence. Second, what are the franchise or similar fees charged in the states you are considering. For example, CA charges $800 a year, while Delaware charges less than $200 for a small company. Finally, in what state will your business be taxed and what are the tax rates there? If you can organize and operate your business in a state with lower tax rates, that is usually an advantage.

The following examples are illustrative:

(1) An interactive advertising client was virtual, with all staff working in different locations around the country. The goal was to go public or be sold. I formed a Delaware C corporation for the company.

(2) A VA company providing Internet search services wanted a holding company for businesses in the U.S. and abroad. Here, too, we used a Delaware C corporation.

(3) A French national wanted to launch an Internet business in the U.S. of which he was the sole owner. We created a Delaware LLC.

(4) A Texas HR and recruiting firm is owned by one person. I created an LLC for that client.

(5) A company importing beverages from the UK has the exclusive rights to the product throughout the U.S. We converted their New Jersey LLC to a Delaware corporation