. . . on the MyCorporation blog regarding LLCs vs. Corporations. I was one of the experts weighing in on this issue.
While it may seem pedestrian to practitioners, considering the amount of ink spilled over this issue, it is an ongoing item of concern for entrepreneurs.
Here is my excellent contribution:
“7. “The short answer is “it depends.” However, 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. There is more flexibility in terms of pass-through tax treatment with LLCs vs. corporations, even with a Subchapter S election.”
– Doug Berman, Corporate Attorney, Law Office of Douglas M. Berman“
Sage advice, indeed.
I got another (non-client) question about whether I prefer corporations or LLCs for startups.
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.