To form a company, you must first decide what type of business structure will best fit your needs, taking into account various factors and weighing the pros and cons of each type of business entity. Many small businesses organize as limited liability companies, while others, especially large businesses, choose to form as corporations.
Decide on what type of ownership structure is best for your business. Owners of a limited liability company, or LLC, are called members while owners of corporations are called shareholders. In most states the minimum number of members and shareholders is one. In general, a member of an LLC can be an individual, another LLC, a partnership, a corporation and even a foreign entity.
Compare the pros and cons of a member-managed LLC versus a manager-managed LLC. In a member-managed LLC, any member can make decisions on behalf of the business. In a manager-managed LLC, only managers can make business decisions for the company.
Compile a list of potential directors for the organization for a corporation. Shareholders in a corporation nominate directors to make business decisions for the company. Many states have rules regarding the number of directors required in a corporation.
Compile a list of all of the documents and fees needed to form an LLC and a corporation. In most states, forming an LLC includes filing a few documents, sometimes just one and paying fees ranging from under $100 to several hundred dollars. The cost of creating a corporation is usually higher as more document filings may be required such as stock certificates.
Compare the tax benefits and requirements of each type of structure. The Internal Revenue Service does not recognize LLCs as a tax class. LLCs must file as a sole proprietorship, partnership or corporation. Filing taxes as a corporation is complex and involves filing numerous forms.
Compile a list of quarterly and annual forms required by local, state and government agencies for LLCs and corporations. Regulation of LLCs is primarily dictated by the limited liability law in a state and enforced by a state agency. Some states require LLCs to file annual statements or reports. Corporations are also under the jurisdiction of state agencies but have additional federal laws that they must follow. These laws require federal reporting and record-keeping mandated by the Securities and Exchange Commission and the Internal Revenue Service.
Compare the liability characteristics of each type of business entity. Both corporations and LLCs are separate entities from owners. These structures protect members and shareholders from personal liability of any debts and actions of the business. However, officers in a corporation can be held personally liable for personal actions such as failure to pay employment taxes.