In the United States, LLC registrations outpace other corporate structures. For their simplicity alone, they suit most entrepreneurs’ startup needs. In 2017, according to the National Small Business Association, the majority of small businesses it surveyed are LLCs (35 percent), followed by S corporations (33 percent), corporations (19 percent), sole proprietorships (12 percent registered, most unregistered), and partnerships (2 percent).
In addition, just like your company name, you can alter your company structure at a later date if it makes sense as your company expands.
If you’re unsure what’s best or how incorporation will affect your taxes, consult with an accountant or other financial professional. And remember: Whatever decision you make doesn’t have to be permanent. You can switch from one business structure to another (though it does require more paperwork and more fees). Here is a quick overview of US corporate structures:
General Corporation
Also known as a “C” corporation, this structure allows as many shareholders as you want and is more typical of large public companies. If your company is in an industry that typically needs a lot of startup capital, like tech firms often do, or if you have aspirations of eventually holding an IPO, then a C corporation might be a better choice.
The problem with the C corporation is double taxation, since it is taxed at both the federal and state levels. Profit distributions are also taxed at the federal and state levels. If you are planning a small business with at most one or two other partners or investors, then avoid this structure.
Close Corporation
Shareholders are limited in number to thirty. Not all states recognize close corporations, so most small businesses choose an alternative structure.
Subchapter S Corporation
An “S” corporation is a type of general corporation that has a special tax status with the IRS that permits business owners and entrepreneurs to be taxed as if they were sole proprietors. S corporations avoid the double taxation of a general corporation, but there are some restrictions to ownership. Only citizens or permanent residents of the United States can be involved, and the shareholder limit is set at seventy-five. For single-person and small businesses, other restrictions make it a complicated structure that can be distracting when someone is starting as a sole owner.
Limited Liability Company
This structure provides the limited liability protection of a corporation with the “pass through” taxation of a sole proprietorship (all revenue and expenses pass through the business to become the owner’s personal income). Also, members of an LLC are able to divide company profits in any manner, regardless of ownership in the company. This flexibility allows an LLC to allocate profits and losses to the greatest tax benefit of the company’s members. Every state recognizes the structure, and there is greater flexibility in how they can be organized and managed.
Limited liability companies can usually sell “stakes” in the business, which act a lot like the standard shares of a corporation. The difference is that anyone who buys a stake, no matter how small, will have as much decision-making power as any other member of the LLC.
Certain types of businesses that provide professional services requiring a state professional license, such as legal or medical services, may not form an LLC, but they use a very similar form called a professional limited liability company (PLLC). In Europe and Asia the LLC structure is replaced by the Limited (Ltd.) entity. They are not exactly the same, but the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company.
Who Is the Registered Agent?
You are required to name a “registered agent” in the state of incorporation. A registered agent is simply someone who is available during normal business hours to receive legal and tax mail for the company. Designate yourself as the registered agent because you are the one who collects the mail. Most online companies do not explain this, and they can trick you into paying unnecessary fees to act as the registered agent for your company.
What Are the Articles of Incorporation?
All new LLCs must file articles of incorporation, which are also called “articles of organization,” with their secretary of state’s office. That sounds intimidating, but it is just a short form that records the names of the LLC and its members, along with their contact information. A single-person entity has one member who is also a manager, and that person becomes known as a member-manager.
Although this is often not required by law, you will be offered the chance to draft an operating agreement for your LLC that spells out the details of the business arrangement, including percentage ownership for you and any other shareholders, along with roles, rights, and responsibilities. For most single-person companies, you simply assign 100 percent of the share of ownership to yourself. If others are involved, the online form isn’t much more complicated than filling in their names and mailing addresses.
By failing to prepare, you are preparing to fail.
— often attributed to BENJAMIN FRANKLIN
Once you’ve incorporated your winning idea, the next step is to create a business plan. Most entrepreneurs want to avoid or skip this, particularly if they aren’t trying to attract investors. However, no matter what your business, I think creating a business plan is the best way to start. Not producing a business plan is like trying to build a car from scratch without any instructions. The process of drafting the plan is the way you figure out how to build and run your company. Further, it’s the way you test-drive that car to see whether it works before you risk taking it out into the real world.
I have gone through the business-plan process for each of my four companies. For two of them I went through the process again during their growth stages. In each case I produced a lengthy document that served as my bible when any vendors or investors asked me any questions, and I always sounded like a confident and knowledgeable entrepreneur on conference calls while my fingers did the walking through the pages. But no one has ever asked me for a copy of a completed business plan. This supports my theory that the primary purpose of the process is to benefit you, the entrepreneur.
Discussing the business-plan process means getting into the minutia of markets, business functions, and financials. Personally, I think reading about business plans can be a bit boring, but I can assure you that the process itself is not. Ultimately, success isn’t measured by the document you produce but by what you as a business owner learn about your market, the customers, and the competition.
Another reason for going through this process is to help attract investors and your preferred vendors. For investors, your plan needs to include an executive summary, from which you develop an elevator pitch, and we’ll look at those in detail. If you are self-funding, you don’t need those. For vendors, you need to focus on and share the specific sections relevant to their service, whether that’s manufacturing, financial forecasts, or marketing.
Invariably, during the process, you will discover unexpected problems and opportunities, and you may need to adjust and adapt your plan, product, or service accordingly. Basically, that is the main point of doing this in the first place. Even if no one else reads the plan, this ensures that your business will fix what you want to change and do so in a way that supports a successful business.
Finally,