When launching a startup, there are a lot of decisions to be made, some of which, although simple, may shape the future of the company and make or break its development and growth. Among those critical decisions is choosing the business entity for your startup. There are two main business entities to choose from, either an LLC or an INC, also known as C Corp.
LLC Business Entity: Pros and Cons
In simple terms, an LLC, or Limited Liability Company, is a hybrid business structure that offers the simplicity and tax advantages of a partnership with the liability protection of a corporation.
An LLC can have many owners, legally known as members, which can be individuals or businesses. Here are the advantages of an LLC entity:
Compared to a C Corp, the initial paperwork for an LLC is quite light and speedy, especially that the US government makes the whole process doable through an online portal.
As the name indicates, an LLC entity gives the company’s owners limited liability, which means that all of their assets, including their bank accounts, homes, and cars, are protected in case the business loses money or falls into debt.
If you decide to go with an LLC for your startup, you can either participate along with the other owners in the decision-making process, or hire a manager, or a group of them, to take care of that for you. That can come in handy if the owners of the LLC aren’t experienced in business management.
Pass-Through Federal Taxation on Profits
LLCs are pass-through entities, which means that all of the profits hit the owners’ pockets without being taxed by the government on the company level. Keep in mind that the profits are still taxed on the members’ federal income tax returns, so an LLC is not a free pass on taxes.
It does sound appealing, doesn’t it? Nevertheless, there are some niggles with LLC startups, mainly:
High Penalty for Non-Compliance
Regardless of whether or not it has activity, an LLC is required to file an income tax return and MCA annual return each and every year. In the case of the non-compliance, the LLC becomes subject to daily penalties until the filing is done.
No Equity Investment
The concept of shareholding doesn’t exist when it comes to LLCs, which is why an LLC startup cannot get equity funds. In other words, if you decide to go with an LLC, you’ll have to rely on funding from promoters and debt funding.
INC Business Entity: Pros and Cons
The C Corporation business structure is expensive, and it’s the most difficult to form in term of paperwork and regulations. Nevertheless, many startups are still using the Inc or C Corp structure because of the string liability protection that it guarantees. So, what are the advantages of incorporation compared to other business entities?
In an Inc startup, the shareholders are only liable for the amount they invest in buying shares of the company, which means that all of their personal assets are protected against any loss or debt incurred by the startup.
Separate Legal Entity
An Inc startup has real existence, which means that the company can sue or be sued in its name rather than the name of the owners/members.
If one or more of the company’s owners dies, the existence of the startup remains unaffected.
What are the disadvantages of a C Corp or Inc startup?
The fees of incorporation are higher than those of other business entities.
Lengthy Setup Process
The requirements, paperwork, and overall process and incorporating a startup are complicated.
Which business structure would work better for your startup? Do you think one of them is better than the other?