The new year is a good time to take another look at your business's formal structure

As the new year arrives many entrepreneurs find themselves wondering if their small business structure is the right one, both fiscally and strategically. So, to help you decide whether or not your company is ready to take the next step in terms of incorporation, we've prepared a quick primer on three popular business organizational structures.

Limited Liability Company (LLC)
Started nearly 30 years ago as a hybrid between corporations and traditional partnerships, LLCs have proven to be an increasingly popular strategy for small business owners. "Of the small businesses I advise, 80% of themend up as LLCs," says tax expert Anthony Mancuso, author of LLC or Incorporation? LLCs allow multiple owners of a company to directly pass through profits to their personal tax returns, as they would in a sole proprietorship or general partnership, while shielding their various personal assets from liabilities or debts incurred by the business. A simple Operating Agreement, which is filed with the state business authority, establishes the LLC and sets up the rules for governing the company as well as the rights and responsibilities of each partner, or "member." Two concerns to be aware of though-LLCs cannot, by law, exist for more than 30 years and most states require unanimous approval by all other members before one member can sell or transfer their stake in the company.


Converting your small business to a full fledged corporation may offer some distinct advantages. In addition, you'll find it easier to attract outside investors and one day sell off your business if you are legalized organized as a C-Corp. "Because of a corporation's built in structure and transparency, investment and venture capital groups are much more comfortable funding them," explains Mancuso. And he points out that "nobody goes public as an LLC." Contrary to popular opinion, incorporating doesn't turn running your business into an adminstrative headache. "The annual fees and paperwork involved are not a big deal," says Irwin Ruppel, a retired small business consultant from Aurora, CO. "They should not be the thing that scares a small business away from incorporating."

Once a widely popular small business structure, S-corporations, which are similar to standard C-corporations except for a more relaxed tax structure, have fallen out of favor recently. "Nowadays, S-corporations are pretty much dead in the water," notes Anthony Mancuso. "Thanks to LLCs, the old conventional wisdom about S-corporations just doesn't apply anymore." This is because LLCs now offer both pass through of profits to your personal tax return and liability protection of personal assets without having to follow the stricter corporate governance rules required of a corporation.
The bottom line? For many small businesses, the LLC arrangement makes perfect sense. But if your business plan calls for a significant expansion, or the need for major capital assistance, or if you may be seeking a payout via a sale in the not too distant future, then becoming a corporation may be the right move.

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