How Should I Incorporate?

One of the questions I am most often asked by startups is “How should I incorporate?”  And the answer is simple: it depends.  We evaluate many things, and before we advise you we talk through the different variables and what-if scenarios.  Some key items to consider include how you are funded, the number of owners, intentions with the business (do you intend to sell your business?), your expected revenue, your personal finances, the type of industry you work in and the current climate in that industry.

When it comes to selecting your legal organization, there are many options and things can get complicated.  One of the big differentiators is how each entity gets taxed.  A single member LLC is taxed differently than a S-Corp.  But, a single member LLC can elect to be a S-Corp for tax purposes.  Did you know that an LLC can also elect to be taxed as a C-Corp?  And where does a multi-member LLC fall in here?  Multi-member LLCs are considered partnerships for tax purposes unless they elect otherwise.  Single member LLCs, partnerships, and S-Corps are considered pass-through tax entities, meaning the tax of the business is paid by its owners on their personal tax return.  Only a C-Corp pays its income taxes from the business.

In addition, picking your legal entity impacts how your ownership is structured.  LLCs have very flexible ownership structures that allow allocations of profits and losses to differ from the actual ownership purposes.  S-Corps are limited to the number of owners, class of stock, and what types of individuals can own the company.  C-Corp ownership can be easily bought and sold without any major impact to the organization itself.

We typically recommend that you contact a lawyer who specializes in your field if your situation is especially complicated.  If you need a recommendation, we can help.  And if you’d like our perspective on your legal organization options, feel free to reach out and schedule a meeting with us here!