Starting up a new company will require more snap decisions at once than you could possibly imagine. It is very difficult to make some of these choices right off the bat, and even harder to know what to prioritize. Fortunately, most decisions can be changed, and many are inconsequential to the success of your business. Categorizing your business as a corporation or a limited liability company, however, is not a decision to take lightly. A limited liability company may sound more appealing because of the tax benefits and protection, but there are a few reasons why taking this route with a start-up company might not be such a good idea.
In order to sign on investors, their tax qualifications must be able to match yours. While they may be able to take you on by adding a new form, their partners could have complications that prevent them from accepting this. Basically, owning a limited liability company singles you out in the business world, and you will not be compatible with every company and investor. Reinvesting also becomes much more involved when multiple parties are liable for the company funds. Corporations tend to be more clear-cut on necessary business transactions.
Harder to Make Money
If you thought up a company that will immediately bring in so much money that you would not even be able to afford taxes on it, then an LLC is right up your alley. The tax benefits and limited personal liability make it a perfect channel for high-earning companies and even non-profits to manage the funds they already have. Most business, however, have a goal of earning money, which takes time. Building capital is quite a bit more challenging when you own a limited liability company. The agreements are far more involved and prone to unexpected tax complications.
Less Appealing to Investors
Generally, investors are used to corporations. They understand them and are prepared for all the paperwork involved. Limited liability companies require extra forms, complicated tax requirements, and incredibly detailed and researched contracts. On top of being more difficult to invest in, the fact that investors are less familiar with this kind of company makes them less trustworthy of your business. You will likely get passed up for standard corporations, simply because potential investors are not trying to sign up for a hassle.
Though owning a limited liability company exempts you from separate business taxes, according to the U.S. Small Business Administration, you can assure that your tax money will still make it to the government. Members of the company must pay this through personal federal taxes, and this process can be a great deal more complicated than just having a flat-out business tax. If you have just begun your company, you need a tax situation that is easy for you to use, manipulate, and combine with other businesses. You also need to be able to accrue investors and build a substantial profit. A limited liability company can be very handy, but you should wait until your company is better established before making this jump.
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