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Business Formation Advice: Corporation v. Limited Liability Company

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Business Formation Advice: Corporation v. Limited Liability Company
 

Now that you have decided to commit your time and resources to starting your own business, the next crucial step is making a decision about the type of structure to choose for it. The two most common structures chosen by businesses are corporations and limited liability companies (LLCs). The type of structure you select will have management, liability and growth implications that a knowledgeable business law attorney can review with you to help you come to a decision.

Corporations: Protecting shareholders from personal liability

Corporations are recognized as legal entities under state law. This means that a corporation can sue or be sued in its name, and it can even be convicted of committing a criminal act. The fact that a corporation is an entity separate from its owners is one of the benefits of incorporating your business.

Shareholders of a corporation are generally not held personally liable for the debts and obligations of the business. Someone with a claim against a corporation is limited to collecting it from the assets owned by the business entity. The assets of the shareholders are protected. There are, however, certain legal rules that shareholders must abide by, so the advice and guidance of an attorney familiar with business structures and corporations should be followed when setting up and operating a corporation.

Multiple layers of management associated with corporations

Management of a corporation is split between a board of directors elected by the shareholders and officers elected by the board. The board might elect a chairman to preside at meetings.

The board of directors of a corporation sets overall policy for the business. This might include deciding on the products or services offered, making decisions about expansion and growth of the business, and setting long-range financial goals.

Day-to-day management decisions for a corporation are left to the officers. Officers can include a president, vice president, secretary and treasurer. The officers carryout the plans and policies put into place by the board of directors. There is nothing to prevent shareholders from being directors and officers in smaller corporations.

Corporations facilitate transfers of ownership and future growth

Owners can easily sell or transfer their ownership interest in a corporation. Shares of stock representing the percentage of a person’s ownership in a corporation can be sold or transferred to new owners. If the corporation needs to raise additional capital, it can offer shares of stock for sale to do so.

The limited liability company: An alternative to the corporate structure

Some people might find the layered management of the corporate business structure to be too cumbersome for their needs. The limited liability company offers the personal liability protection for owners that is associated with corporations, but it may also provide a streamlined management structure.

The owners of a limited liability company are referred to as members. The management structure is similar to a partnership with each member having management responsibilities, or the members can decide to centralize management by appointing a manager or managers.

A business law attorney can help you decide on a business structure

Whether to choose an LLC over a corporation as the structure for your business has taxation and legal consequences that you should discuss with an attorney. The business law attorneys at McKenna Storer have the knowledge and experience to guide you through the process of setting up your business. Contact Jaime Dowell at McKenna Storer for questions about this blog and other business formation matters.

Categories Business Law



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