Question

James, Jill and John want to start a new business and want to be able to raise about $1 million for the business from their family and friends. They are considering forming either a corporation or a limited liability company. Advise James, Jill and John on what is necessary to form and maintain (including administration, taxes, management, etc.) a corporation versus forming and maintaining a limited liability company. Your advice should include comments on the advantages and disadvantages of corporations versus limited liabilities companies.

Answer 1

LLC:

It is formed by one or more person by filing Article of organization and operating agreement. In this profit and loss are passed on to member's basis the ownership.

Advantage:

• Member or owners are being protected from being held personally liable
• Pass through taxation which means tax at personal level rather than individual level giving flexibility to business

Disadvantage:

• The startup cost in terms of annual fees is on higher side
• Checks made of LLC cannot be cashed
• Difficult to manage personal and business records as mix up can lead to trouble in taxation and other filing

Corporation:

It is a legal entity formed by filing in the state where it is present and designating shareholders with specific numbers. Additional there are board of directors.

Advantages:

• The startup cost of operation is lower than that of LLC
• The liability is limited only to the extent of investment
• Has ease in raising capital from market by issuing shares which is not in case of LLC

Disadvantage:

• Issue of double taxation which is first in business profit and then on dividends which is not in case of LLC
• Requires excessive paper work in tax filing and other formalities which is not in case of LLC