Which Business Structures Are the Best for Your Start-up?

As I previously discussed, some business structures are just bad choices.  Fortunately, there are several good business structures to choose from.  If you are considering incorporating your internet business, you have probably heard the terms C-Corporation, S-Corporation, or LLC.   Depending on your business unique circumstances, you and your attorney or CPA can determine which is best for you.

A C-Corporation or Inc. have the following characteristics:

• Personal liability protection. Business has its own identity and is separate from the owners or shareholders.  The assets of a shareholder or owner cannot be accessed by entities or persons the corporation may be liable.
• Free transferability of interests. Corporation can issue an unlimited amount of shares and shareholders can transfer their ownership
• Continuity of life. Corporation can exist for perpetuity.
• Can issue an unlimited amount and classes of stock.

HOWEVER, a C-Corp should only be considered if your company is financially able to maintain the corporation and your company has a Board of Directors and Investors. Why? C-Corps are:

• Expensive to maintain.  The corporation incurs annual fees to maintain the corporation status.  Administrative costs of accounting and tax preparation.  Federal income tax on corporation is high.  Also shareholders are taxed on their ownership. This is called Double
  Taxation.
• Administrative Burdens.  Must have annual shareholders meetings; issue stock; keep and maintain corporate minutes; have a board of directors and officers.

A  S-CORPORATIONS are a business structure that operate like a C-Corporation but S-Corporations do not incur Federal Corporate Tax.

The Characteristics of a S-Corporation are:

• Operate like C Corporations.  (See C-Corp above)
  • The difference between a C-Corporation and S-Corporation is the tax treatment.  C Corps have a high federal tax rate and S-Corps are taxed like partnerships, i.e., shareholders are only taxed on profits on their personal income tax return.

HOWEVER,

• A S-Corporation can only have 100 shareholders. 
• A S-Corporation can only issue one class of stock.

A Limited Liability Company is a hybrid structure that is a cross between a corporation and a partnership.

The characteristics of a Limited Liability Company are:

• Benefits of liability protection like a corporation
• It is Simple to set-up
• Taxed as a partnership. No corporate tax.
• Can elect to have a single-member LLC or Multi-member LLC.
• Free transferability of interests in LLC.
  • Continuity of Life of LLC (at least until the last member has been disassociated with the LLC)
  • Does not require yearly administrative costs and burdens as C Corporations and S Corporations

HOWEVER,

• LLC cannot issue an unlimited amount of shares.  It can only issue stock in limited circumstances.  Basically members who are owners are issued unit certificates that represents their ownership in the company.
• If you issue stock or securities similar to a C Corporation, the LLC will loose its status as a Limited Liability Company and will be considered a C-Corporation.

Remember to consult an attorney or CPA before choosing a business structure.

About the Author
Latoicha Givens is the founder and a member of the firm Phillips Givens, LLC. Ms. Givens practice includes represention of start-ups, small, and mid-sized businesses in intellectual property matters, specficially, trademarks, copyrights, and licensing issues. She is the author of IPLAW101.com, a blog covering Intellectual Property issues specifically trademark law - trademark registration and infringement; Domain Name Disputes: Cybersquatting; Licensing and Intellectual Property issues in New Media.
See all posts by Latoicha Givens.