LLC or Corporation? It’s Not Easy to Decide

Most new business owners, after investigating an idea and developing a business plan, are faced with deciding what kind of legal entity they should form their company under. Of the four types (sole proprietorship, partnership, corporation, or limited liability company), corporations and limited liability companies (LCCs) are often preferred. In a recent Huffington Post article, these two types of entities are described as “easily the two most popular business structures.” But which one should an entrepreneur choose? That’s what the article aims to help you determine.

Author Deborah Sweeney points out various pros and cons for each entity, which are condensed below:

LLC

Pros

• Limits owners’ personal liability for debts
• Easier to run (less requirements and flexible structure)

Cons

• Owners all have the same amount of decision-making power as other owners [We address the validity of this below]

Corporations

Pros

• Owners have decision-making power according to ownership stake

Cons

• More difficult to run (strict requirements on decisions and reporting)

Sweeney’s breakdown is overly-simplified. Although she correctly asserts that corporations require greater formalities than LLCs, and are thus “easier to run”, she makes other mistakes. Both LLC and corporate owners have limited liability. This is primarily why both LCCs and corporations are the most popular business structures. Further, corporate owners are usually not allowed to participate in the management of the company; they only do so through directors.

She also gets some things wrong.

Most importantly, she incorrectly states that LLC owners all have the same amount of decision-making power. This is not entirely correct. Under many state laws, including Minnesota laws, the voting power of  members when voting on governors (the LLC’s version of directors for a company’s board) is “cumulative”, which means each member has the number of votes allotted to them according to their ownership (or, sometimes called membership) stake in the LLC. This is often limited in the articles of incorporation for an LLC, which is the form required for establishing an LLC in most states.

For other decisions, voting is controlled by provisions in the member control agreement, which can stipulate that members have equal voting power or voting power according to their ownership. Often, these agreements can be very complex, depending on the preferences of the founders of the company as well as those who are financing it.

At the end of Sweeney’s article, she asserts that entrepreneurs are happiest when they choose the right kind of legal entity for their business needs. We couldn’t agree more, but this requires the entrepreneur to understand more of the pros and cons and work with an experienced legal professional to make the right decision. Consider contacting Vlodaver Law Offices, LLC to get expert advice on establishing a new business.

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How to Start a Small Business, Steps 10-12

Jeff Haden at Inc.com recently wrote an article entitled “How to Start a Small Business in a Few Hours” (see link below). He recounts how one of his neighbors incessantly talked about starting a small business, but never actually took the first steps toward doing so after sharing his ideas for six months.

Often, new entrepreneurs mystify the process of starting a new business, Haden asserts. They are often intimidated by complexity and their lack of knowledge about what legal tasks are required to actually begin business.

With the goal of helping his neighbor actually take the first steps necessary to launch the business, Haden bet his neighbor they could complete these first steps in under three hours. He provides nine simple tasks that can be finished, together, in under three hours:

1. Choose a company name, any name (because that name doesn’t have to be the name of your brand)
2. Apply and receive an Employer Identification Number (EIN) from the IRS
3. Register a trade name (assuming you know what you want to be called)
4. Apply for a business license with the local Chamber of Commerce
5. Complete the necessary tax forms
6. Determine what permits you’ll need, and apply for them
7. Fill out forms for a certificate of resale
8. Create a business bank account at a local bank
9. Start your own simple accounting system

At the end, Haden says “And now you’re an entrepreneur, with all the documents to prove it”. While any sophisticated lemonade stand-minded entrepreneur might only need concern his- or herself with these tasks, it is much more likely that most substantial business ideas will require many more tasks. The entrepreneur will spend days, if not weeks, launching the business.

Perhaps starting a business isn’t so simple after all—or, at least, if the business idea stands to be highly technical, profitable, or complex (and let’s face it, the best ones are), at least a few more steps are required:

10. Determine an appropriate business structure

Who will own the business? One person? Two people? The financiers and the entrepreneur? Who will run the business? Will the owners be separate, or will they be a part of the business’s launch and operations? What kind of liability protection is desirable for this business, based on the products or services it is contemplating? These questions and more must be answered to determine whether to structure the business—legally—as an LLC, corporation, sole proprietorship, or partnership.

11. Draft contracts and agreements

Smart new business owners know that contracts are their first line of defense against customers, employees, partners, landlords, and even clients. Will the business need non-disclosure agreements? Contracts for sale of goods? Services? How will disputes be mediated?

12. Retain formal legal services

Lastly, for all other major steps, a new business should have the support of a seasoned lawyer to put protections in place and defend the company if need be.

Starting a business still involves complex tasks and questions without clear solutions and answers. Getting past the basic steps, as Haden outlines, businesses should consult with legal counsel to pursue serious opportunities. If you need help with steps 10-12, consider reaching out to Vlodaver Law Offices, LLC at www.vlodlaw.com.

Inc. Article at Yahoo.com.