If your business starts off with multiple owners, it usually makes sense to hire an attorney to help you initially. We'll go over that but first, some background.
Your for-profit, state-law entity choices are (1) LLC or (2) corporation. If you’re a multi-owner company with no plans for equity compensation or seeking investors, it can make more sense to form an LLC in most states.
There are some exceptions, but generally speaking:
- LLCs are easier to form and operate;
- The liability protection is at least as equal as corporations; and
- They’re usually the same price or less, with some limited exceptions.
If you choose LLC and you have multiple owners, your tax choices are:
- Partnership (default; most common);
- S corporation (also common);
- C corporation (almost no LLC elects this).
If you choose corporation, your tax choices are:
- S corporation (common for Small Businesses, occasionally for Startups but rare)
- C corporation (default; common for Startups, but not Small Businesses)
Talk to an Attorney
We don’t want to mislead you over the complexity for multi-owner Small Businesses. It’s smart to consult with an attorney to help make this decision. You’ll want an attorney’s help with either your operating agreement (if you choose LLC) or shareholder’s agreement (if you choose corporation). And, most attorneys include choice of entity guidance as part of the package for helping you to start your business.
The easiest way to think of it is this -- if you plan on your multi-owner Small Business generating a reasonable amount of revenue or you’re investing resources into the business, it’s more than worth it to get the attorney’s assistance. There are too many factors that an attorney can advise you on that wouldn’t be able to be covered in any concise way that would be useful.
But, if you’re not planning on virtually any revenue and you’re just doing a hobby-related business with a partner (moonlighting artists, for example), then the simplest and cheapest route is to form an LLC and accept the IRS default tax-status -- partnership. The amount you would pay an attorney for assistance would likely cost more than any money you’d save from getting his or her advice.
That being said, disclaimer time: “always talk to an attorney.”
Chris Daming, J.D., LL.M.