The Advantages and Disadvantages of the Different Legal Entities
When you’re planning to launch a new business enterprise, one of the first and most important decisions you must make is the type of legal structure to select. If you want to protect your personal assets from any potential liability of the business, you’ll probably want either a corporation or a limited liability company (LLC). A sole proprietorship offers no shield from personal liability, and in partnerships, only limited partners can avoid personal responsibility. What are the advantages and disadvantages of corporations and limited liability companies? Why choose one form over the other?
Deciding between a corporate structure and an LLC involves three considerations:
- Personal liability—With both types of entity, owners are liable only to the extent of their investment in the business. With corporations, the owners (known as “shareholders”) risk only the value of the shares they purchase. With limited liability companies, the owners (known as “members”) stand to lose only the money they paid to obtain their ownership interest.
- Taxation—Corporations and LLCs can be subject to different tax consequences. If you set up a C corporation, you will be subject to double taxation—the corporation pays tax on its profits, and shareholders pay personal income tax on any dividends paid out. With an S corporation, there is no corporate tax. The same holds true for a limited liability company—there is no tax at the company level. Any distributions you take from the LLC (unless you are paid as an employee) are taxed only as part of your personal income.
- Administration—As a general rule, corporations have more filing and reporting requirements than limited liability companies. In addition, a limited liability company is generally not a good choice for companies that plan to go public or do business internationally.
Contact MCIS Law for Assistance Starting a Business
At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to startup and existing businesses in southeast Texas. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We are currently communicating with clients by phone, text message, and videoconference. We accept all major credit cards.