LLCs vs. C Corporations - Which Structure is Best for Your Business
As an entrepreneur, choosing how to structure your business has a direct impact on the future of your business and the opportunities that come with it. It can affect finances, change your daily operations, and cause potential issues or time-consuming matters. You should carefully evaluate all of your options for structuring your business, so that you can choose the best fit for you. There are many different factors at play when it comes to structuring your business. This article will explore the options you have so that you can feel confident in making the right decision.
LLCs and the Benefits
An LLC, or limited liability company, is a hybrid business structure that combines features from corporations, sole proprietorships, and partnerships. It is easier to establish than other business structures because there are less requirements and paperwork to file. This is a great and affordable option for a startup and, as indicated in the name, an LLC allows you to limit your liability, reducing the personal risk that you take as an owner. Your business will own your assets, debts, and liabilities, instead of yourself as an individual. It allows you to have “pass-through” taxes, meaning you will get to choose if you are taxed as a corporation, or instead as an individual passing through the gains or losses of the business. Management of an LLC is more flexible as well, as you do not need to have any type of regular board meetings or formal investor communication. If you want to have flexibility of operational structure, along with ownership protection, you should consider an LLC.
Forming your business as an LLC may create less interest from investors. Many investors are unable to invest in businesses that use the pass-through taxes as described above. Transferring ownership is more difficult and complex for LLCs. Depending on the state in which you establish your business, there are sometimes taxes required in order to do business in the state. Even though there may be challenges in raising later stage investment, we recommend LLCs for the great benefits and flexibility for young businesses.
C-Corporation and the Benefits
A C-Corporation is a legal entity that can operate as a business independently, and is taxed at the entity level. This means that income generated will be taxed again when it is distributed to the shareholders. The ownership aspect is one of the C-Corporation’s primary benefits. Depending on who wants or does not want ownership in the business, ownership can be easily transferred and it allows for multiple owners. It is established with permanent existence, meaning that departure of any individuals does not have an effect on the status of the business.
The double taxation aspect of C-Corporations is a negative feature, as businesses are trying to retain and operate with as much money as possible to help themselves succeed. This can be a barrier to entry for a small business who has limited financial resources. This is something to greatly consider as you evaluate your options with your business. The operational requirements of C-Corporations are more formal. They require shareholder meetings and a board of directors. C-Corporations can be a great option if access to capital and revenue is not limited. For emerging brands, the financial liability associated with a C-Corporation can be a limiting factor.
Which Structure is the Right Fit for Your Business?
LLCs provide a strong combination of the best features of other structures. It is a great fit for a business like yours that is first starting out. The risk is limited, which can be very helpful as an entrepreneur that is launching their business. Lastly, LLCs will grant you the most flexibility for how you set up and operate your business. It is a straightforward business model that can greatly benefit a young food business. If you are looking to eventually expand the business greatly in the future, you may want to set your sights on converting to a C-Corporation. This is a good option when you have a profitable business, confident in consistently making money.
Always make sure you are taking into account all factors that may impact your business as you decide which structure is the best fit. Then, you will put yourself in the best position possible to have the most success.