Where I Add to the Pile of Opinion Regarding Corporations vs. LLCs for Startups

I got another (non-client) question about whether I prefer corporations or LLCs for startups.

Short Answer:

It depends.

Long-Winded Answer:

I have found that an LLC will often provide more flexibility in terms of division of rights and responsibilities from the default rules in many business entity statutes.  In addition, there is more flexibility in terms of pass-through tax treatment with an LLC than with a corporation, even with a Subchapter S election.

If there are a small number of owners, or it is owned by a single person, they can usually get to the same result regardless of the entity type.  In that case, the most important thing is to have some type of limited liability entity in place, and a corporation and an LLC are similar enough that the same results can be achieved through a variety of strategies.

Many people suggest a corporation because it is easier to attract investors, but that is not necessarily the case.  Only a small portion of small businesses attract the type of institutional investors (such as venture capital firms) that would require the company be organized as a corporation.  Investors in some industries may expect specific organizational forms for their investment.  For example, real estate or natural resources investors may expect the company to use a limited partnership.

If an entrepreneur is in discussions with, or knows it may want to approach, an investor prior to organization, the investor’s concerns can be met up front.  However, in the beginning the organizational form should be driven by the entrepreneur’s and business’ needs.  Unless the entrepreneur knows who will make the investment and what their criteria is, there is no way to predict the terms up front as every situation is different, and there is likely to be some required restructuring done prior to the investment in any case.