When forming a startup, owners face the challenge of selecting a business entity that best fits with their personal and professional objectives. Although there are several business entities in the State of California, most startups elect to either incorporate or form a Limited Liability Company (LLC). Each business entity has its own advantages and disadvantages.

Selecting the appropriate entity may often depend on weighing out the differences and determining which best suits your startup’s needs.

Liability Protection

Both LLCs and corporations offer owners limited liability. This means that an LLC or a corporation provides protection for the owner’s personal assets unlike other entities like sole proprietorships or partnerships. Under California law, a creditor is (generally) not permitted to access an owner’s personal assets; instead, a creditor is only allowed to access those assets which the owner has identified as collateral or put in the business’ name.

This is one very important quality the two business entities share. However, it is the differences between the entities that lead an owner to elect one business entity over the other. We discuss some of those differences below.

Management of the Business Entity

A startup, like any other business, requires careful management. In choosing an appropriate business entity, startup owners must consider the filing and management requirements of each entity.

LLCs are either designated as “manager-managed” or “member-managed.” They are required to follow fewer and less strict requirements than a corporation. Members or managers manage the day-to-day operations and they also a direct say in the business’ operations.

Corporations do not offer the same “hands on” approach of an LLC. Corporations must elect a board of directors to manage the corporation. The board, however, does not manage the corporation’s day-to-day business. Instead, it will appoint executive officers who are responsible for regular business operations. Additionally, corporations must hold shareholder meetings in which shareholders vote on the approvals of major corporate decisions.

Taxation

In California, an LLC is, by default, taxed as a partnership, which for status purposes is considered a pass-through entity. The tax structure of a partnership allows the entity’s profits or losses to pass through directly to the owner(s). For LLC owners/members, choosing the default taxation method may be most advantageous but it should always be discussed with an experienced attorney.

Unlike an LLC, corporations are “double-taxed.”  Generally, this means that a corporation is taxed at both the entity and the owner level. While a corporation may also benefit from pass-through taxation–here, it would be classified as an S-Corporation–it would be subject to more strict restrictions. Individuals forming a new startup should discuss these restrictions with an experienced attorney.

Selecting an entity that is appropriate for your business will depend on how you plan to run the business and where you hope to take it. One size does not fit all. Crafting a strategic entity can mean a world of difference as your business begins to take off.

CONTACT A SILICON VALLEY STARTUP AND SMALL BUSINESS ATTORNEY TODAY

Before forming their startup, owners must always carefully evaluate the advantages and disadvantages of the business entity they plan to elect. The numerous advantages of both LLCs and Corporations help make the decision easier. Still, startup owners should sit down with an experienced business attorney who can help ensure that the startup’s election is best suited given the startup’s goals. Kalia Law P.C., is committed to providing you with simple, easy to understand answers to your complex business questions. Schedule your initial consultation by calling (650) 701-7617 today.

- Claire Kalia

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