Starting a new company with your business partner is an exciting time, but it’s also a time with many important responsibilities. You need to come up with a name for your new business venture, create a business plan to help guide your development process, and figure out what type of products or services you want to sell.
In addition, you’ll also need to make an important decision about your business entity structure. Should you form a limited liability company (LLC) if you have a business partner? What are the other options?
First off, let’s quickly outline what an LLC is. A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds. LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
The other two most common options for a business with multiple owners are to operate as a general partnership, or to form a corporation. The general partnership is a casual, no-frills business entity that doesn’t require any formation or maintenance tasks. All you need to do is start conducting business with your partner, and you are automatically part of a general partnership.
The general partnership is obviously quite convenient. However, it certainly has its limitations. To start with, a general partnership is not considered by the government to be a distinct legal entity from its owners. Instead, the general partnership is treated legally as an extension of its owners’ personalities. In fact, the general partnership doesn’t even have its own legal name — it operates under the personal names of its owners.
The big problem with a general partnership is that you don’t receive any personal asset protection like you would with an LLC or corporation. That means that if your business is sued, your creditors can pursue your personal possessions, like your house, car, personal bank accounts, etc. Clearly, this is a situation that should be avoided at all costs, so we really don’t ever recommend operating a general partnership.
How about the corporation? Corporations do receive personal asset protection, and like the LLC, they also have unique business names. The biggest advantage of the corporation, as opposed to the LLC, is that a corporation can issue stock, which means that the corporation has far greater expansion potential than an LLC does.
In addition, the corporation is centuries old, while the LLC has only been around for a few decades. This means that there is more precedent in the court systems regarding how corporations should be treated legally, and that predictability is another positive aspect of corporations.
On the other hand, corporations have more complex formation and maintenance requirements than LLCs do. Corporations have a rigid managerial structure that must be followed strictly, with a board of directors who oversee big-picture matters and officers who handle the daily details. They also require extensive upkeep, like holding regular meetings for its directors as well as its shareholders, and keeping detailed meeting minutes for those meetings.
In addition, while an LLC has several options for taxation models, the corporation only has two (the C corp and the S corp). The C corporation is subject to “double taxation,” which means that profits are taxed at 21% on the corporate level, and that same money is taxed again when each shareholder pays taxes on their dividends.
As for the S corp, it’s a similar tax structure to the LLC’s default option, but there are many restrictions on S corp eligibility that exclude many corporations from using this option. To qualify for S corp taxation, your business can’t have more than 100 shareholders, and every shareholder must be a United States citizen or resident.
It’s obviously quite difficult for us to make any blanket statements regarding which is the “best” business structure. Whether you form an LLC or a corporation, you will receive personal asset protection, which in our opinion is enough to make these far better options than simply operating a general partnership.
At this point, your decision is between a corporation and an LLC. A general rule of thumb when choosing between these business structures is that most small businesses choose the LLC, whereas larger businesses with ambitious expansion plans turn to the corporation.
The LLC is much simpler to form and operate than the corporation, there are typically fewer fees involved, and there is a less formal structure to adhere to when it comes to management. Additionally, the way an LLC provides taxation options to its owners can save you a considerable amount of money.
However, corporations are much better entities when it comes to securing outside investments, because the vast majority of investors prefer stock. It’s not unheard of for an LLC to attract investors, but it is highly uncommon nonetheless.
For most of our readers, we feel like the LLC is the right choice. And keep in mind that if you change your mind down the line, there are ways to convert an LLC into a corporation (and vice versa, for that matter). If you end up deciding that the formalities and expenses of the corporation would actually be worth it after all, you will still have options.
If you’re looking for assistance with your formation without breaking the bank, we recommend hiring a business formation service.
There are dozens of reputable online services that can save you a ton of time, while also costing far less than hiring a business lawyer to form your LLC or corporation. If you want to take a look at the top options, head on over to our guide to the seven top formation services available.
We think you should start an LLC before you begin conducting business. While it is entirely legally acceptable to operate your business as a sole proprietorship or general partnership before forming an LLC, doing so subjects you to a number of risks that LLCs don’t have to worry about.
For example, informal business structures don’t have limited liability protection, so any lawsuit filed against the business can include the owner’s personal assets as well as the business assets.
Using an online LLC service removes much of the hassle from the business formation process. With these services, all you need to do is provide them with the name, location, and industry your business operates in, along with some info about yourself and your registered agent.
The service then creates your articles of organization and files them with your state to create your new LLC.
Absolutely. There are quite a few reputable companies offering LLC formation service these days, including the three top LLC services we discussed earlier.
In fact, while we certainly have our opinions about which ones offer the best pricing and features, every one of the incorporation services we discuss on this website is entirely legitimate and trustworthy.
In some ways, using an LLC service does protect your privacy, especially if you choose to also have that company serve as your registered agent.
This is due to the fact that, if you serve as your own registered agent, your personal address will often become part of the public record. Using a registered agent service not only provides the privacy of using the agent’s business address as your own, but it also significantly cuts down on junk mail.
This is why we’re such big fans of companies like Northwest Registered Agent that include a year of registered agent service with their LLC formation packages.
This is an impossible question to answer in an across-the-board manner, as each business type has its own advantages and disadvantages. That said, the LLC is typically the more suitable option for small businesses and solo entrepreneurs, while the corporation is usually a better fit for large companies. For more info, check out our complete comparison guide between LLCs and corporations.
The answer to this question lies in your personal preferences, but we can give some general pointers. An attorney will cost the most by a mile, but also provides expertise you won’t find with the other options. The DIY route is free of charge but can require quite a bit of legwork and provides no peace of mind that the process is being completed correctly.
Using an LLC service means your business will be formed by professionals who know what they’re doing, while also costing significantly less than a lawyer. This “best of both worlds” attribute is what makes LLC services our preferred option.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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