Written by Michael Palermo
You plan to start a business and start making money—first, though, have a conversation about who will run that business and how those profits will get allocated.
“Should we form a corporation or a limited liability company?” This is, by far, the most frequently-asked question I get from startups. Rather than just spout a bunch of general rules about why corporations are the best structure or why you need to form an LLC—which, frankly, do my clients no good—I back them up from this check-box formality and get them to think about who has an “interest” in their business.
That is: Who will be making decisions within the business; who has an interest in the business that might not rise to the decision-making level; and what profits will the various parties be expecting for their investment. After considering these factors we can then decide “corporation or LLC.”
I’ve found that new business owners often fail to consider who will be making decisions within the business—or who thinks they may be making decisions. Your Uncle Bob, who gave you $100k seed money, might want to show up at the shop every day and make critical decisions about the business; you might just want to use his money, pay him his dividends, and see him on holidays. That’s a huge divide between the expectations of the two, which invariably will lead to conflict. “Corporation or LLC” doesn’t solve this problem.
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