When you start a new business, you need to select a corporate structure for the business entity. There are a variety of options to choose from, but the most commonly recommended is the limited liability company. This has a lot of benefits for taxes, liability, and flexibility. However, it may not always be the right option. The following are four reasons why you should choose a structure other than LLC.
1. Investors May Prefer Corporate Stock
When an investor pays money to help you grow your business, he or she will want some ownership of the business in return. This can be accomplished in a number of ways, depending on the business structure. However, a lot of investors prefer to receive stock in a C-Corporation. This is the simplest way to own part of a business. It is also the simplest to sell in the event the investor wants to exit. You may have an easier time getting an investment with a C-Corporation.
2. Investors Don’t Always Like LLC Taxes
Similarly, investors may not want to pay taxes for LLC ownership. LLC taxes are a little unusual. The members can elect whether to pay taxes like a corporation or like a partnership. The latter is usually less expensive (avoid double taxation), but it causes the business to be a pass-through entity. This means that the owners (including investors) pay the taxes on their personal returns. For some investors, working with a pass-through LLC is an unwanted complexity.
3. Some Investors Can’t Work With LLCs
Certain investors, particularly venture capitals, cannot work with pass-through LLCs because they have tax-exempt partners. These investors will tell you this and may be willing to have you simply change your structure. Nonetheless, it is important to know.
4. LLCs May Require Additional Taxes in Other States
Depending on where the LLC is incorporated, there may be some additional income tax rules. This can be frustrating for partners or investors who want to keep their taxes as simple as possible. Filing with an extra state can be an unnecessary complexity, especially for someone who is betting on your business’s success.
Explore Your Options Today
In many cases, a limited liability company can be a very useful corporate structure. However, it is not without faults. The above reasons may cause you to choose a corporate instead. Of course, that also can have drawbacks. This is an important topic to research and understand.