LLC or Corporation? How to Pick the Right Business Structure for Your Startup

Corporations and Limited Liability Companies are easily the two most popular business structures. Both have their own sets of pros and cons, and there are plenty of articles scattered across the internet comparing LLCs and Corporations. However, many of the business owners that I talk to aren't as interested in the minute details of the different business structures as they are in what type of structure they should choose. Of course there is no simple answer, but as LLC formation outpaces corporate formation by two-to-one, most businesses obviously prefer to form Limited Liability Companies. Still, there are certain types of businesses and industries that are better suited for corporations. But is your business one of them? Or, like many other companies, should you form an LLC? The answer depends a lot on your industry, and on your aspirations for the future.

Small, higher-risk ventures

Business owners often choose to form corporations and LLCs because it limits their personal liability for the business's debts -- if the business goes under, debtors typically cannot seize the directors', executives', or members' personal assets to pay for what the business owes. Both corporations and LLCs provide that protection, but corporations are a bit more difficult to run as most states place strict requirements on how corporate decisions have to be made and reported. If you run a smaller company and are looking to reduce risk, a limited liability company may be a better fit. Restaurants, for example, are reported as having a slightly higher-than-average three-year failure rate of 60 percent, and most restaurant owners don't have time to meet all of the administrative obligations placed on corporations. Smaller, mom-and-pop shops are also typically better suited for the LLC structure as there are fewer requirements that have to be adhered to, making LLCs easier to run. If the business is pretty small, then, an LLC will likely be a better fit than a corporation.

Vendors and independent contractors

Truckers, vendors, and other types of people that work in an industry that serves larger businesses often form LLCs because many of the larger companies that use these services are wary of contracting anyone who could be seen as an employee. Contracting an LLC, instead of a person, helps those larger entities solve that problem, and the owner of the LLC doesn't have to worry about everything that goes into running a corporation. It is a legal nuance, but the best way to navigate those industries that serve other businesses is simply by owning your own company and contracting through it.

High-tech firms, and other companies looking for investors

Limited liability companies can usually sell "stakes" in the business, which act a lot like the standard shares of a corporation. The difference is anyone who buys a stake, no matter how small, will have as much decision-making power as any other member of the LLC. Investors are also a little wary to invest in limited liability companies since the structure is newer, and therefore less familiar. If your company is in an industry that typically needs a lot of start-up capital, like tech firms often do, or if you have any aspirations of attracting investment or eventually holding an IPO, then incorporation might be a better choice.

It's important to remember that whatever decision you make doesn't have to be permanent -- you are allowed to switch from one business structure to another, as long as you are willing to fill out the paperwork, pay the fees, and adhere to the rules that govern that particular type of entity. But I have found that most entrepreneurs are happier when they have less to worry about, so finding the right structure early on is probably more appealing than switching back and forth. Every business is different, but it does seem like some industries mesh better with one structure over the other. Small, locally run, independent businesses like limited liability companies, while businesses with higher start-up costs or initial investors do better as corporations. The final decision is up to you, so spend some time figuring out what you want to accomplish by forming a separate structure for your business, and then see which type of entity better fits your needs.

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