Deciding Whether to Incorporate? Which Format Is Best For You?
Ah, that we can't tell you; you'll need to decide based on your unique situation. This is a major decision and it's worthwhile to get legal advice.
While you're at it, be sure to consult a qualified tax advisor as well. The various corporate formats are taxed differently and offer the possibility of different deductions. Your ultimate decision, such as the choice between a "C" or "S" corporation, may be determined by the tax repercussions.
Don't dismiss the standard C format too quickly, advises Chris Reid, an attorney with St. Louis-based law firm Thompson Coburn. Some of his clients opt for a "C" Corporation because they can establish an employee health plan with as few as two people (such as husband and wife). This allows them to deduct health insurance premiums.
Furthermore, a "C" Corporation can deduct the salaries it pays to employees, which lowers the taxable income of the corporation. Depending on your situation, these perks may outweigh the C's tax disadvantages. The bottom line, says Reid, is "to do all the math" before making your decision.
“People think LLCs are more flexible because they're new, but this isn't necessarily the case,” Reid adds. "While there's less paperwork for setting up an LLC, its operating agreement has to be fairly detailed. You have to spell out the company's rules, allocate profits, and say how you're going to distribute them. This is great if you want to be very specific, but it involves a lot of up-front work and many people just starting out aren't sure how they want to handle all these issues yet."
On the other hand, if you really want to lay ground rules, a detailed LLC operating agreement might suit you just fine. "It can be very appropriate for a joint venture, where you want to make sure each party understands its rights and responsibilities," says Reid. "It's also well-suited to enterprises involving several people, such as real estate or venture capital investments."