Legal Question in Business Law in California

The decision process of whether to form a partnership, LLC or corporation will depend upon a number of factors: (1) exposure to liability; (2) management structure; (3) investment protocols; (4) tax considerations; (5) business model/plan; (6) expansion plans and (7) exit strategies. If you would like a FREE MEMORANDUM on the advantages and disadvantage of various legal structures, just send us an email.

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Shawn Jackson ESQ. (707) 584-4529

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The above mentioned factors are key considerations. I would just add that most start-ups also need to think about budget. Many start-ups start as one entity and as they grow they can convert to another entity (i.e., start as an LLC and later convert to a Corporation). This should be discussed in the early stages.

I would suggest that someone with some business-management knowledge be added to the team. A quick and simple way to accomplish this is for the lead promoter to go on Amazon and buy (and then READ) two or three self-help paperbacks on forming and operating your own small business. Such books contain tons of good advice, and a few errors and omissions, which is why you are better off with two or three than just one. In 40 or fewer hours of study, an intelligent person with little prior business-formation or operation experience can learn, at least, the right questions to ask, and at best, will already know what the answers will be when the questions are put to experts such as the company's lawyer, accountant, banker, and insurance broker.

I prefer corporations with an S tax election for businesses that may have high sales and low margins, like grocery stores, because LLCs pay an extra state franchise tax on gross revenues; and LLCs for companies that will have high deductions and little or no sales in their initial years, such as farming, real estate and hi-tech, because the promoter-investors will enjoy more liberal write-off rules. There are other little differences between S-corps. and LLCs, such as the former cannot have nonresident alien owners, while the latter may.

There are some organizational differences as well. Corporations are run by their boards of directors, which are elected by the stockholders, and in turn hire the management. LLCs are owned by members and managed by managers, who very often are the same as the members. Corporations have bylaws; LLCs have operating agreements (contracts) fulfilling substantially the same purpose. It is more awkward to move an LLC into the public-trading arena; it can be done, but it would be more sensible to convert it to a corporation before going public.

However, for a great many startups, the biggest factor may be what would you rather be, XYZ, LLC or XYZ, Inc.?