What legal structure (e.g., LLC, corporation) should I use for my new business?

Whether you’ve just conceived the idea for a new app, product, or service, or whether you’ve been operating for years, dealing with the legalities and technicalities of starting and operating a start-up or small business can sap the creative energy of even the most resilient. To that end, this post is part of a series addressing common questions from start-up founders and small- and medium-sized business owners alike.

As you might expect, my explanations on these topics are general and should not be construed as legal advice. Therefore, if you have specific questions or concerns, I encourage you email me at chad@cummings.law or click here to set up a meeting.

Starting a new business is an exciting and challenging endeavor. One of the most important decisions you’ll make when starting a business is choosing the legal entity type. The legal entity type you choose will affect your liability, taxes, ownership structure, and management style. In Florida, the most common legal entity types for small businesses are limited liability companies (LLCs), partnerships, and corporations. In this blog post, we will discuss the practical considerations in choosing a legal entity type for your start-up.

Liability

One of the primary reasons entrepreneurs form legal entities is to limit personal liability. LLCs and corporations offer personal liability protection, while partnerships do not. This means that if the business incurs debts or legal judgments, the owners’ personal assets are generally protected. However, it is important to note that personal liability protection is not absolute. If you engage in fraudulent or illegal activity, you may still be held personally liable.

Taxes

The legal entity type you choose will also have significant tax implications. LLCs and partnerships are pass-through entities, meaning that the income generated by the business is passed through to the owners, who report it on their individual tax returns. In contrast, corporations can be taxed as separate entities, which means that the business pays taxes on its income, and the owners pay taxes on any dividends they receive. This can result in double taxation, which may be a disadvantage for some businesses.

Ownership and Management

The legal entity type you choose will also determine the ownership and management structure of your business. Corporations have shareholders, directors, and officers, while LLCs have members and managers. Partnerships are owned by the partners and managed by general partners. If you want to have a board of directors or issue shares of stock, a corporation may be the best option. If you prefer a more flexible management structure, an LLC may be a better choice.

Cost and Complexity

The legal entity type you choose will also impact the cost and complexity of forming and maintaining your business. LLCs are generally easier and less expensive to set up and maintain than corporations. Corporations require more formalities, such as holding annual meetings, keeping minutes, and filing annual reports. This can add to the cost and complexity of running a corporation.

Flexibility

LLCs offer a great deal of flexibility in terms of management, ownership, and taxation. LLCs can be managed by the owners, or by a separate management team. The owners can choose to be taxed as a partnership or a corporation. This flexibility can be an advantage for start-ups that want to adapt to changing circumstances.

Future Plans

When choosing a legal entity type, it is important to consider your future plans for the business. If you plan to raise capital from investors, a corporation may be the best option. Corporations can issue shares of stock and have a board of directors, which can make it easier to attract investors. On the other hand, if you plan to keep the business small and closely held, an LLC may be a better option.

Exit Strategy

When choosing a legal entity type, it is also important to consider your exit strategy. If you plan to sell the business or take it public, a corporation may be the best option. Corporations can issue shares of stock and have a board of directors, which can make it easier to sell the business or go public. However, if you plan to sell the business to another owner, an LLC may be a better option. LLCs are generally easier to transfer ownership than corporations.

Conclusion

In conclusion, choosing the right legal entity type for your start-up is an important decision that will impact your liability, taxes, ownership structure, and management style. It is important to consider all of the practical issues when making this decision.

Next Steps

Use the buttons below to to set up a meeting. When starting or operating a business, timing is critical; therefore, if you need assistance with your business venture, it is important that you retain the services of a competent attorney as soon as possible. Should you choose to contact me, we will begin with an introductory conference—via phone—to discuss your situation. Then, should you choose to retain my services, I will prepare and deliver to you for your approval a formal representation agreement. Unless and until I receive the signed representation agreement returned by you, my firm will not have accepted any responsibility for your legal needs and will perform no work on your behalf. Please contact me today to get started.

As the expression goes, if you think hiring a professional is expensive, wait until you hire an amateur. Do not make the costly mistake of hiring an offshore, fly-by-night, and possibly illegal online “service” to move your company. Where will they be when something goes wrong? . . . Hire an experienced attorney and CPA, knowing you are working with a credentialed professional with a brick-and-mortar office.
— Prof. Chad D. Cummings, CPA, Esq. (emphasis added)

Picture of attorney wearing suit and tie

I am an attorney and Certified Public Accountant serving clients throughout Florida and Texas.

Previously, I served in operations and finance with the world’s largest accounting firm (PricewaterhouseCoopers), airline (American Airlines), and bank (JPMorgan Chase & Co.). I have also created and advised a variety of start-up ventures.

I am a member of The Florida Bar and the State Bar of Texas, and I hold active CPA licensure in both of those jurisdictions.

I also hold undergraduate (B.B.A.) and graduate (M.S.) degrees in accounting and taxation, respectively, from one of the premier universities in Texas. I earned my Juris Doctor (J.D.) and Master of Laws (LL.M.) degrees from Florida law schools. I also hold a variety of other accounting, tax, and finance credentials which I apply in my law practice for the benefit of my clients.

My practice emphasizes, but is not limited to, the law as it intersects businesses and their owners. Clients appreciate the confluence of my business acumen from my career before law, my technical accounting and financial knowledge, and the legal insights and expertise I wield as an attorney. I live and work in Naples, Florida and represent clients throughout the great states of Florida and Texas.

If I can be of assistance, please email me at chad@cummings.law, or click here to set up a meeting.