The selection of the entity for your new San Diego business is one of the most important decisions you will make out the outset. If your business is “for profit” you will generally have three options:
- Limited Liability Corporation or LLC
- S Corporation
- C Corporation
Before we take a look at why you would select each entity, there is one important concept you must understand:
Your business entity is not established so that you have the right to conduct business. It is established as a separate entity from you personally, upon whom all liabilities will be placed. The corporate entity shields you personally, as well as your assets from the reach of any business related creditors or liabilities. It is there to protect you.
The structure of the corporation affects the ease with which decisions can be made, new owners or investors can be added, and how income will be taxed. Many entrepreneurs and new businesses assume that an LLC is the best and easiest choice. This may be true for the majority of small businesses, as it provides flexibility and certain tax advantages when income is less than 6 figures.
If all you ever intend to this new business to be is a small business, and LLC may be the right entity for you. However, if you intend to grow this business, or ever believe you may want to attract investment from multiple sources, including the public an LLC won’t provide the best protections or capabilities.
If your new business will basically become “you.inc”, and you are a high wage earner an S Corporation may provide a significant tax advantage, depending upon the nature of your business and how the income is classified.
The C Corporation provides the greatest flexibility downstream, and is a platform that allows a business to grow from a “one person show” to a major conglomerate. It provides a business structure that easily expands and contracts to reflect the conduct of business, while having enough “substance” as an entity to manage the issuance of stock, and multiple levels of ownership, voting and profit distribution. There is a perceived “second layer” of taxation with a C-corporation that may not be present in an LLC, but this is offset by the capacity of the C-corporation to handle the business structures and protections required for the business itself to grow and succeed.
Therefore, the first question I always ask when entrepreneurs are seated across from me discussing the formation of a new business is this:
What is your exit strategy?
This question almost always throws them off balance. Hoever, it goes to the core of the selection of a corporate entity.
If you are considering an LLC, S Corporation or C Corporation we invite you to contact us for a free and substantial consultation at 866-631-3470. Learn why you can’t simply download forms from a website and be “in business.” Learn about the genuine risks you face, and all that Allen Barron can do to support you, coach you and help your business to become profitable and successful.