Learn how to choose the right legal structure for your business.

1. Basics

How many owners will your company have?

The number of owners in your LLC can influence your business structure. By definition, partnerships must have two or more owners, while S-Corporations cannot have more than 100 owners.

Will any of the following be owners of your company?

Certain business structures, such as sole proprietorship and S-Corporation, require that their owners must be individuals. And to become an S-Corporation, owners must be a resident US citizen.

2. Funding

How will you finance your business? (select all that apply)

Some investors prefer funding specific business types – banks typically require a business to be incorporated while venture capitalists lend mostly to C corporations.

3. Industry

Is your business industry vulnerable to lawsuits?

Some industries are more litigious than others. For example, a general contractor in the construction industry is at greater risk for a lawsuit than a graphic designer.

Does your industry require a state license? (e.g. doctor, attorney, accountant, architect, etc.)

Most states require that licensed professionals form as a limited liability partnership, professional corporation, or professional limited liability company. Answering yes to this question eliminates LP as an option.

Will the primary purpose of your business be to own real estate for investment?

LLCs are typically the leading choice for realty investors, as they often choose a formal business structure for each investment property that they own.

4. Income

What kind of income do you expect your business to earn? (select all that apply)

Estimating your company's revenue can help determine how you structure your business for tax purposes. CT advises that any discussion of tax implications should involve your accountant.

Do any of the following apply to your business situation? (select all that apply)

While most situations favor a C corporation structure, your personal situation may vary. Remember that any tax year-end date that is not December 31 will eliminate LP and LLP from consideration.

5. Taxes

Do you want pass-through taxation?
(No income paid at the business level, profits/losses reported on owners' personal tax return and any tax due on business income paid at the individual level)

Pass-through taxation creates a situation where a business’s income and losses are not taxed. Answering Yes eliminates C-Corporation as an option, as taxes are enforced at the entity level for C-Corporations.

Do you want to minimize self-employment taxes?

While we suggest you vet this decision with an accountant or tax advisor, incorporations tend to present a favorable treatment of self-employment taxes.

Which employee benefits would you like to offer? (select all that apply)

Your company’s employee benefits may include taxation relief, and C corporations tend to incur the most benefits. CT advises that you discuss this particular decision with an accountant or tax advisor.

6. Future Plans

Do you want to minimize ongoing recordkeeping requirements?

In order to maintain limited liability protection, corporations must follow certain recordkeeping requirements, including annual meetings and documenting decisions of directors and shareholders. Other business types do not face these requirements.

What are your long-term business goals? (select all that apply)

While this may seem like putting the cart before the horse, your exit strategy should inform how you structure your business. For example, wanting to sell your business at a profit would eliminate your partnership options. Conversely, a desire to be publicly traded would require formation as a C-Corporation.

Based on your answers, LLC may be best.

It seems we couldn't find a good fit.

Advantages of a Limited Liability Company

  • Owners (members) are typically not personally responsible for business debts and liabilities.
  • LLCs allow for pass-through taxation.
  • There are no restrictions on number of owners or who can be owners.
  • Owners have flexibility in structuring company management.
Learn More About LLC

Advantages of an S Corporation

  • Owners (shareholders) are typically not personally responsible for business debts and liabilities.
  • S corporations allow for pass-through taxation.
  • S corporations may have self-employment tax savings over LLCs.
  • Capital can be more easily raised through sale of stock (as long as IRS guidelines are met).
Learn More About S Corp

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Disclaimer:
CT Corporation is not a law firm and does not provide legal advice. If legal advice is required, please seek the services of an attorney. Read CT Corporation's full disclaimer.