When setting up a new business, whichever entity you choose will have financial, legal and tax implications. Business owners often narrow their choices down to a corporation or a limited liability company (LLC). For tax purposes, a corporation can be a C-Corporation or elect to be taxed as an S-Corporation. The S-Corporation operates like an LLC taxed as a partnership, is a pass-through entity whose income, losses and tax credits are passed through and taxed to the owners.
Some basic legal differences also exist between the corporation and the LLC. The corporation provides personal liability protection for its owners. Owners are called shareholders or stockholders and they are issued stock certificates. Shareholders elect directors, and they, in turn elect officers. By-laws and the business corporation law govern the entity. The stockholders should enter into an appropriate shareholders' agreement that addresses the objectives of the shareholders and the business itself.
The LLC also provides an owner with personal liability protection. Owners are called members. Owners can be issued membership certificates or designated a percentage of membership interest (there is no stock). An operating agreement and the limited liability law govern the entity. The limited liability company law is not as comprehensive as the business corporation law, allowing the operating agreement to have significant control over the members and their business relationships.
In choosing and structuring a legal entity for your business, it is important to consider the business objectives as well as the tax, regulatory and legal environment. We work with you and your other advisors to develop the best solutions.