Business Lawyers Blog
Entrepreneurs often have questions about which business entity to choose when starting out. There are essentially two choices to make.
State Level Decisions: LLCs vs. Corporations
The first decision is which type of entity is best at the state level. Here, the most common options are limited liability companies (LLCs), or state registered Corporations. In both cases, the filings to establish or “form” the entity are made with the Secretary of State within the state of incorporation depending upon where the company wishes to formally register. Forming either entity is a first step for business owners limiting their liability in the company in order to ensure the company owners private, individually owned assets are shielded from lawsuits against the company. This is the main purpose of filing corporations or LLCs at the state level.
IRS Elections for Tax Purposes
The second determination is typically how the Company will “elect” to be taxed. In this context the word elect does not mean voting or anything democratic, but rather is just the technical term for the choice a company makes for tax filing purposes with the IRS. This choice is most commonly between S corporations, and C corporations. There are many important distinctions and tax ramifications based on this choice (or “election”). Such discussions are best had with a CPA who has individualized knowledge about your specific business.
However, one (though to be sure not the only) distinction between S and C corps is how they are taxed. Put simply, S Corps are “pass-through entities.” This means that when the IRS is reviewing your tax returns, it expects to see the income “passing through” the LLC directly to the income of the company ownership. C-Corps are, by contrast, considered taxable individuals at the federal level. Thus, C Corps will be taxed on income (assuming a taxable event has occurred), and then the ownership of the C Corp will also be taxed.
Often times clients conflate these two issues – that is state-level entity formation and tax elections, but they are actually distinct decisions and concepts. Below, we discuss some of the finer points of state-level formations which our Oregon corporations lawyers explain in detail.
Creation and Compliance of LLCs and Corporations at the state level
Now we know that entity formation and tax elections are distinct concepts, what is the difference between an LLC and a corporation?
LLCs: Limited liability companies, are reasonably straightforward to set up. Our offices handle such formations on a daily basis.
- Such entities are typically considered more flexible than corporations.
- They are also often more affordable to establish from a legal fees standpoint because they usually require only an “Operating Agreement” (sometimes called an “LLC Agreement”) containing the important elements of company profit-sharing and control considerations.
- LLC’s also provide reliable protection for the members who own the company. ORS 63.165 explicitly states that the organization’s liability for debts or other obligations is the organization’s alone. A creditor of the LLC can only bring a claim against the LLC. They can’t personally sue an owner absent unusual circumstances. However, the devil is in the details and there are important follow up tasks to ensure that the owners of the company are able to fully take advantage of state limited liability protections.
- For those without business partners, setting up a single-member LLC is almost always the best way to go as compared to Corporations.
Corporations. Much like LLCs, corporations also offer limited liability protections. However, corporations have their own advantages and drawbacks as well.
- Primarily, corporations place (or “vest”) control of the company in a board of directors. For companies seeking investment – particularly significant amounts of start-up capital – corporations are ideal because the money can be brought in and spent based on an agreement that may give the other shareholders less control of day-to-day operations. For example imagine a company with 100 shareholders. Trying to gain consensus from so many individuals would make even the easiest of decisions a nightmare. Corporations fix this problem by vesting decision making in a board.
- Because the board is able to make certain decisions without the shareholders’ approval, setting up the mechanisms that allow the shareholders and board understand their rights requires a thoughtful process.
- Board positions may allow for more corporate flexibility and accountability. For example, if an investor in a corporation is unhappy with performance, then they may be able to hold a seat on the board and move the company in a different direction without having to rework all of the corporate agreements.
Choosing the Right Entity for an Oregon Business
Selecting the appropriate business entity is one of the most important decisions an entrepreneur will make when launching a company. The right choice will depend on a company’s ownership structure, growth plans, financing strategy, and long-term business goals.
Because the implications of entity selection can affect a business for years to come, entrepreneurs benefit from carefully evaluating their options with an SLG attorney before forming a company. Experienced legal counsel can help assess these factors and ensure that the entity structure aligns with both operational needs and future expansion.
Businesses considering which entity structure best aligns with their goals can benefit from guidance from an experienced Oregon business attorney. Structure Law Group’s business team can help evaluate the available options and provide legal guidance tailored to your specific needs. Contact Structure Law Group’s Oregon office at 503-388-3000 today to schedule a consultation and take the next step toward building a strong foundation for your business.