Demystifying Corporations and LLC’s

Whether or not you should form a Corporation or a Limited Liability Company (LLC) for your new business is a simple and straightforward question that more often that not has a complex and confusing answer.  The short answer is that if and when you can afford the costs associated with doing so, then you absolutely should.

If you make the decision to incorporate or form an LLC, you will have to absorb the initial cost of hiring an attorney and an accountant to make sure that the entity’s corporate and financial books are established correctly.  Thereafter, you will have an extra tax return to file (aside from your own personal taxes) and you will have to pay the State of California approximately $800 per year.  The bottom line is that forming a Corporation or an LLC will add at least $2,500 to your year-one start-up costs.

The obvious question then is, “And what do I receive in exchange for this increased outpouring of cash?”  Well, you get the benefit of insulating your own personal assets from the entity.  The company functions as an independent entity with its own assets and liabilities that are 100% distinct from the owner’s personal financial circumstances.  You also get to pay yourself as a W-2 employee thereby avoiding those nasty self-employment tax assessments at the end of the year.  There can also be less tangible benefits such as the perception in the marketplace that your company is larger than a single person, and more organized and “official” than a sole proprietorship.  Also, there are some large companies out there that will only contract with LLC’s or Corporations and simply won’t do business with sole proprietors.

Having said all of that, financial realities may dictate that you have no other choice than to start out as a sole proprietorship.  It should be part of your business plan to transition into a formal entity as soon as revenues increase to a level where you can justify the increased operating expenses associated with being a Corporation or LLC.  The transition itself can be tricky and time-consuming, but the bottom line is that almost every business out there better serves its owners when it operates as a Corporation or Limited Liability Company.

For those ready to explore what it takes to set up your own independent entity, check out WICademy: Consulting 101.  This is an interactive video conference series exploring how to “set up shop” taught by members of the non-profit Women In Consulting.  These experienced business owners will be sharing their and expertise to help launch the next set of successful “independents”.  It starts May 1, 2014.  To learn more about the course, visit http://bit.ly/1dh9P6R

trevor@trevorcaudlelaw.com' About Trevor Caudle

Trevor Caudle is the sole owner of Trevor Caudle Law Practice, PC a boutique law firm located in San Francisco that focuses on all manner of advice to small businesses. The firm’s website can be found here: www.trevorcaudlelaw.com and Trevor can be contacted directly at trevor@trevorcaudlelaw.com or 415.260.0947.

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