Forming a Corporation or LLC for your business – Many Choices to Consider

For choice of entity: LLCs offer simplicity and limited liability to sole proprietors, but rules and structure of corporations help attract other equity principals and investor capital.

By Robert A. Adelson
Mass High Tech, March 28, 2012

If you are launching a new business, it is wise to create a separate legal entity under which you conduct the affairs of your new business. Creation and use of this entity, either a corporation or LLC, can protect you against liability, enhance your credibility in the marketplace and provide an ability to offer equity to employees and investors.

For that entity, you have a number of choices –
•    Do you want a corporation or LLC?
•    Do you create an S corporation or a C corporation?
•    Do you form or incorporate in Delaware of Massachusetts?

Each has its own strengths and weaknesses which I mention further below. LLCs, S Corporations and C corporations, whether Massachusetts or Delaware are all limited liability entity but have differences in tax treatment, costs, complexities and other business attributes.

LLC – Limited Liability Company

The LLC can offer the greatest simplicity if you are a “single member” LLC – i.e. you don’t have a partner or anyone else own any equity besides yourself. In that case you don’t need a separate employer ID or need to file a separate tax return. The entity can be reported on your Schedule C. However, if you will have other owners, you will need an operating agreement which can be quite complex and is not recommended unless your LLC will own real estate or other tax sheltered assets in which case despite the complexity, it offers tax advantages.

S Corporation

The S Corporation will require its own employer ID and tax return but can offer the advantage to single owners of allowing you to allocate part of your income to a distribution which avoids self employment tax of 15.3 percent, which is taxed on all LLC income. It’s worth discussing with your accountant whether the tax savings from an S corporation justifies in your mind the added work of the S corporation. The corporation is also recommended if you will be using your corporation to try to recruit people to your company and offering equity. Offering stock or options in an S corporation is much more straight forward then offering member units in an LLC.

C Corporation

The C Corporation is best when you know you will be seeking outside investment from angels or venture capital investors. The S Corporation unlike the C Corporation cannot offer preferred stock, cannot accept partnership shareholder or non-resident alien shareholders, all of which are desired when outside investors are brought in. The Corporation is also more liquid and accepted as an investment vehicle than an LLC for business investments and thus preferred.

Delaware vs. Massachusetts

For those who are starting small and bootstrapping their startup, a Massachusetts LLC or Corporation is the best as the simplest and cheapest means to a limited liability entity for your business. If you incorporate in Delaware (or Nevada), you will need to hire and pay for a resident agent there as well as incorporation and annual costs there, and still have to file to do business as a foreign corporation or LLC in Massachusetts which in total will cost more and offer greater complexity. However, if you will be seeking angel or VC investment, such investors prefer Delaware laws which prefer majority shareholders and investors over employee investors and will likely insist on that state or incorporation for your C corporation.

With each of these entities, it is wise to hire an experienced business and tax attorney, skilled in this area to both guide you through the process and draft your business organization documents. There are many pitfalls in the road to forming a business entity and it is unwise to try to do this on your own or to take your focus away from marketing, sales, product, team and business operations your business needs to succeed.

The author of this article, Robert Adelson, has been an attorney for more than 30 years and is a partner in the Boston law firm Engel & Schultz, LLP.  He represents entrepreneurs and startup companies, executives and employees, independent consultants and family businesses.  He is a frequent speaker and moderator for ENET and other entrepreneurial and professional groups and authors of numerous articles published in Boston Business Journal and Mass High Tech and other publications on business and tax law topics.  Mr. Adelson is also  chairman of the IEEE Boston Entrepreneurs’ Network (ENET), organized in 1991, with monthly meetings in Waltham and Boston to help technology-based entrepreneurs of eastern New England.  See www.boston-enet.org  You can reach Robert Adelson at radelson@engelschultz.com or view his website at www.ExecutiveemploymentAttorney.com

© Robert A. Adelson 2012

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Author: Robert Adelson

Robert Adelson has been a corporate and tax attorney since 1977. He began as an associate at nationally prominent New York City “mega” law firms, first at the Wall Street firm Dewey Ballantine Bushby Palmer & Wood and later at the Park Avenue firm Weil Gotshal & Manges. In 1985, Adelson returned home, where he has since established himself as a respected Boston business attorney. He has attained partner at several small and midsize Boston law firms, most recently at Lawson & Weitzen LLP and then Zimble Brettler LLP, where he was a partner from 1994 to 2004 before becoming a partner at Engel & Schultz LLP from 2004 to 2019. With the breakup of that firm over semi-retirement of senior partners, Robert Adelson formed the firm Adelson & Associates, LLC, where he is the principal, that commenced operations 1/1/2020.

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