If you are thinking about launching a startup, you likely have questions about the legal processes involved in formally registering your company. There are many steps that must be taken before your startup can be fully registered and recognized by the government. And one of the most critical of these steps when you register your company is determining how your startup will be legally structured by your business formation process.
There are four main categories of legal business structures recognized by the government. They include corporations, partnerships, sole proprietorships and limited liability companies. These legal business structures impact the ways in which each business is taxed, managed and held liable for losses, debts and/or wrongdoing. As a result, choosing the legal business structure that is most compatible with your vision for how your startup will be run is a particularly important process of your corporate structure.
However, this formation process is not always straightforward, which is why it is important to speak with an experienced attorney before making a final decision. Some structural distinctions are fairly nuanced, while others are simply confusing. An attorney experienced in matters involving the business formation process will be able to help you sort out the differences and apply them to your startup’s unique needs. For example, you may wish to incorporate as a limited liability company and your LLC taxed as an S-corp, or you may want to incorporate as a corporation and be taxed as an S-corp as opposed to a C-corporation.
LLC Structure Taxed as an S-Corp
Limited liability companies are attractive to many startup owners because they offer a flexible management structure while simultaneously insulating their owners from being held personally liable for business debts, losses, etc. Another significant advantage to structuring as an LLC is that this option allows business owners to be taxed at either the personal or corporate level.
A single-member LLC is taxed as sole proprietorships by default. Similarly, multi-member LLCs are taxed as partnerships by default. But owners of LLCs can decide to be taxed like S-corp or C-corporations if they so choose.
Corporate Structure Taxed like an S-Corporation
There are technical reasons why a startup may benefit from a legal business structure as a corporation instead of an LLC. Only LLCs taxed as C-corporations are taxed at the corporate level rather than on personal returns, so this is not the primary reason why startups choose to be recognized as corporations and taxed as an S-corp. Like an LLC, corporate structure allows for limited liability. But unlike an LLC, the managerial corporate structure is largely inflexible. LLCs are run by owner/members who make the decisions for the company and/or invest in it. Corporations (taxed as either S or C) are owned by shareholders and run primarily by a board of directors.
Business Formation Assistance Is Available
If you are interested in keeping your business relatively small and your management style flexible, your startup may benefit from creating a legal business structure as an LLC partnership or single member LLC. If you would prefer that your business be beholden to stockholders, you may wish to structure your business formation as a corporation. In either case, your startup may be designated as an S-corporation for tax purposes. Whatever your decision may be, please consider reaching out to LawTrades for assistance with the legal formation process. We have experience aiding more than 5,000 startups in this way and are eager to help you get your company off to an excellent start.