Wanting to finally take the plunge and start up the business you?ve been pondering? The types of businesses may seem confusing and difficult to grasp, but here?s a quick rundown of what they are to you (and which one you should consider based on your needs).
The LLC
If you?re just sitting on a couch after your day job dreaming of starting up a small self-funded business on the side that will hopefully one day go public as a huge company, then look no further.
LLC?s are easy to manage, convertible to the other types once you hit your million-dollar a quarter revenue goal that attracts big boy investors, and do so without the overly-bulky legal framework that the other options provide.
Just like the ?bigger? corporation legal structures listed beyond this section, an LLC will give you and your personal assets a legal barrier against your business?s dealings (including major fuckups) that would otherwise cost you everything you own in the event of a bad lawsuit. Just remember to follow the advice at the end of this article too.
They usually cost the same to found, and the caveat is that there really should be only one person running the show ? and if more, then a 50/50 split is your only feasible option here. But the ease of doing so if it?s just you is, as Mastercard puts it, priceless.
S Corporations
S Corporations are a little more complex than LLCs because they introduce stock. Furthermore, LLCs can be converted to S corporations for if/when the day comes where your little LLC wants to be sold in part to investors looking to make a huge return on throwing money at it.
S corporations are a paperwork nightmare, however. You have to openly declare to your state how much stock you wish to make available (?outstanding? is the legal term, confusingly enough), and at the time of incorporation you must name the initial shareholders and officers.
Usually you don?t go with this option unless your big idea is big enough to attract the guys with the sacks of money. They would want some large amount of stock in your company in order to give them all that voting power with each share so they ensure the company?s decisions will earn them money, and to get dividends for each share out of the total 100% of the company they now own. Figure out where that leaves you.
They are, however, ideal for partnerships: If your partner affirms that you?ve got the brains behind 70% of the ieda and operation with the intent of carrying that ideology over to the corporate structure (initially and operationally), then this is perfect: You simply initialize the S corporation with 100 shares of common stock and declare you as owning 70 with him/her owning the remaining 30 shares of stock.
Also, taxes are paid when dividends are paid out: you have to set a date each year that dividends of the corporation?s profits will be divided out for each share and written out in check form, holding taxes to be paid to the Fed in the process.
Luckily, unlike C corporations, this is the only time you?re taxed ? amid a larger set of tax breaks given to corporations if you manage your books well.
The downsides are: having to keep corporate minutes of shareholder meetings organized at least two weeks in advance, the book balancing nightmare, the paperwork and corporate bylaws to be signed and adhered to, and miscellaneous other little legalities to deal with. If stock doesn?t suit your fancy, then steer clear of this one for the time being as well as the next monster?
The C Corporation
C corporations are meant to be used by your big operations. They have legal structure for multiple classes of stock (common and preferred) and are double-taxed: the corporation gets taxed off of its profit, and that profit gets taxed again when it gets divided out for each dividend to be paid out.
The different stock classes are to distinguish between voting and non-voting stock: preferred stock stakeholders only get dividends with no other real benefit other than a higher priority in getting those dividends, while common stock stakeholders make corporate decisions ? one vote per share, attending shareholder meetings if >10 shares of common stock are owned by common corporate bylaws.
The paperwork could balance a scale with ?War and Peace.? All the nitty gritty details are spelled out in all the forms you have to do, and the regulations on top of that make it even worse.
So, in short, don?t go for this one unless you already have huge interest by some insanely wealthy investors ? and even then they?ll probably do all of this for you anyhow. They?ll need the resources for a CPA to balance those books and keep an eagle eye on tax angles.
But if your company ever actually needs this, conversions from the lower rungs of the ladder are always possible. Never forget that ? start small and work your way up.
Advice
LegalZoom.com is a pretty good starting point, the packages are very convenient though they cost the same ? just don?t buy more than you need to in light of that fact, read this in full and understand the difference.
No matter what option you go for, always open up a corporate bank account when your certificate of existence and articles of incorporation come in the mail to keep your personal assets separated from your business?s assets. Mark Cuban has complained about this with companies he has invested in, so listen to that advice.
With that said, just remember to follow your regulations and get your licenses and you?re set. In a follow-up piece I?ll write about conglomeration and how to make several good business ideas make you money at the same time. Thanks for reading.
About Chris:
Chris started at The Coffee Desk during its hey-day as an infrequent guest author who slowly grew to becoming a mainline contributor. He is a business grad student at USC who is very fluent with technology and the ever-evolving web, and has priceless contributions to Silicon News as a result. He is known for looking at the "big picture" of things, namely new technological trends, and analyzing them from a business perspective that so many IT professionals tend to glaze over in their focus on the technology's specifics.
Source: http://silicon-news.com/news/2013/01/17/c-s-llc-corporation-startup/
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