Once you have decided to not put everything you own at risk, it is a fundamental decision that every new business owner needs to make: Corporation or Limited Liability Company?
Do you know what factors are most important in making this choice? You will know the answers after you read this post.
The entity you choose is the bedrock of the company you plan to run; it’s your legal protection and the vehicle through which the business operates. To help people choose wisely, I am going to lay out the factors that actually matter in choosing between an Oklahoma corporation and an Oklahoma limited liability company. I will also tell you what factors I believe have less value in choosing between an Oklahoma corporation or Oklahoma LLC.
Keep in mind that the weight of each factor in relation to your specific situation is critical.
You might want to choose a corporation if . . .
You expect to be soliciting outside investment in the company. A limited liability company should work fine when you have but a few investors. However, when the number of investors increases, the LLC may be less useful. By way of example, you may see resistance from potential investors if you can’t offer them stock certificates for shares of corporate, a much more familiar to many investors.
You are prohibited from using an LLC. While most businesses are permitted to choose either a corporation or an LLC, there may be some restrictions. For anyone who must be licensed to engage in a certain occupation, trade or profession, many states and licensing boards have specific requirements or restrictions on the type of entity a licensee may choose to practice his profession.
You expect to offer extensive fringe benefits. These benefits can include the payment of health insurance premiums and direct reimbursement of medical expenses. The corporation can deduct the cost of these benefits and they are not treated as taxable income to the employees. Having your own corporation pay for these fringe benefits and then deduct the cost as a business expense can be an attractive feature of doing business through a regular corporation. These opportunities for you to receive tax-favored fringe benefits are somewhat reduced if you do business as an LLC. Also, a regular corporation may be able to offer better retirement benefits or options under a corporate retirement plan.
You want to use stock to lure and reward employees. Enticing or compensating employees with stock options or stock bonuses requires forming a corporation since LLCs do not issue stock.
You might want to choose a limited liability company . . .
You prefer a less formal operating structure. A limited liability company can be operated by the members (owners) with no officers or other officials required. Additionally, a limited liability company is not required to hold annual meetings of members or maintain meeting minutes. In contrast, most corporation have these types of annual requirements.
You want more flexibility in sharing profits and losses. Limited liability company members are allowed to divide profits and losses in ways members choose. S-corporation shareholders are required to receive dividends according to the number of shares that they own, regardless of the level of time and attention they put into the business.
You have owners who aren’t US Citizens. An LLC can be owned by any combination of individuals or business entities. Only United States citizens and resident aliens may own an S Corporation. Other entities generally may not own an S Corporation.
The factors that matter less:
1. Limited Liability Protection. To sum this one up . . . in most situations the owners receive the same legal protection whether they are shareholders in a corporation and members in a limited liability company. Both entities protect the individual owners’ assets.
2. Stability of business operations. In the past there was a significant difference in the continuity of a business between a corporation and an LLC primarily because an LLC could not have a perpetual existence–it was required to exist only for a specified number of years or terminate by a stated date. This is no longer required. The IRS regulations laying out this distinction were changed to allow an LLC to have the same perpetual existence as a corporation and Oklahoma law allows perpetual existence.
3. Formation Costs. There is a belief that an LLC is easier and less expensive to set up. This is usually not true. In my case, the cost for forming each entity is identical as you can see here and here.
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