Entity Choice Generally

Do I need a corporation or LLC for my business?

Congratulations! You just asked the best question (which is why it's also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

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What’s a Corporation?

A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

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What’s an LLC?

An LLC, or limited liability company, is a type of entity that protects its owners and mangers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.

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What’s the difference between an LLC and a corporation?

Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

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What’s a C Corporation?

A C Corporation is a Corporation that hasn’t elected under the Internal Revenue Code to be taxed as an S Corporation. The best way to describe it is to check out what an S Corporation is. Trust me; it’s not circular.

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What’s an S Corporation?

An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to what corporations can be S Corporations. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.

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Should I incorporate in Nevada?

You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

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Should I incorporate in Delaware?

You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: One, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Two: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as a “foreign” corporation/LLC.

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Should I form my LLC or corporation in a state other than where I live?

If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is. There may be other reasons to be in another state, but those come up rarely.

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Why should I form a corporation/LLC for my business?

Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, not all things. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize an LLC.

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