Choice of entity considerations: LLC or Corporation?
Are you deciding whether to form your company as an LLC or a corporation? Here are some key considerations to guide your choice:
- Liability Protection: LLCs might offer stronger protection than corporations. Although courts generally apply similar standards for both LLCs and corporations, LLCs often face less stringent requirements regarding capitalization and adherence to formalities. In fact, some states have statutes stating that failure to observe corporate formalities alone cannot be grounds for personal liability for LLC members.
- S Corporation Election: If an LLC wants to elect S corporation status, it may need to amend its operating agreement to comply with the single-class-of-stock requirement, depending on the existing agreement’s terms.
- Conversion Flexibility: LLCs can easily convert to other business entities, which can be beneficial for startups planning to go public. However, securing investment might be more challenging with an LLC. Tax-exempt organizations, such as pension plans and IRAs, often invest in startups, but they may face tax issues on unrelated business taxable income (UBTI) when investing in LLCs.
- Tax Elections: An LLC has the flexibility to choose its tax status as a partnership, S corporation, or C corporation without formally converting to these entities. Many states allow for entity conversions, like Michigan’s option to convert an LLC to a corporation using a specific form. Depending on state regulations, the IRS might permit the new entity to retain its existing EIN.
By understanding these aspects, you can make a more informed decision on whether to set up your business as an LLC or a corporation. For more information of choice on entity consideration, contact a ShindelRock advisor.