James, Jill and John want to start a new business and want to be able to...

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.

Expert Solution

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

keosha answered 1 year ago

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