By: Allen T. May, C.E.O. of Westwood Associates, LLC
There is nothing more exciting than starting a new business venture. Its one of those things that not everyone "gets" when we attempt to share our excitement with others. While some may see a lot of work, long hours and frustrations, entrepreneurs see opportunity. Starting a new business venture is not about money and risk. Rather, its about opportunity and challenge.
So how do smart entrepreneurs start with an advantage over other entrepreneurs? There are tremendous benefits for entrepreneurs to start their new business venture with the structure of an aged Limited Liability Company. If you're reading this blog, you've probably narrowed your choice between either the tried-and-true Texas shelf corporation or the Texas shelf LLC. So you're wondering, "Which one is best for me?" There is no universal answer that applies to every business venture. I wish there was, but the corporate laws and tax structure create a menu of options for different situations. Nevertheless, some general principles may prove helpful for you when attempting to select what is best for you. Some of these benefits include:
For the majority of new ventures, the relative simplicity and flexibility of the Texas LLC make it the better choice. This is especially true if your company will hold title to real property that's likely to appreciate in value of the years. That's because regular corporations and their shareholders are subject to a double taxation, hence, both the corporation and the shareholders are taxed at the federal level, on the increased value of the property when the property is sold or the corporation is liquidated. In contrast, the Texas LLC member-owners avoid this double taxation because the company's federal tax liabilities are passed through to them. The Texas LLC itself doesn't pay a federal tax on its income.
However, a Texas LLC isn't always the best choice. Occasionally, other factors may tip the balance toward a c-corporation. For example, if you anticipate having multiple investors in your new business venture or to raise capital from the public, you would probably be better served with an aged Texas c-corporation. While the shelf Texas LLC works fine when you have just a few investors, especially those who will be active in the day-to-day operations of the company, it may get more complicated when the number of investors increases over time. For example, you'll likely run into resistance from potential investors if you can't offer then the corporate stock certificates that they perceive to be tangible evidence of their partial ownership of the company. Investors like to have something in their hand that's tangible.
I remember about 10 years ago I invented in a Denver, Colorado LLC start-up that was "suppose to revolutionize" the online marketplace for trading in high-risk equities. The salesman's pitch was awesome. I bought a 5% stake in the LLC for $150,000.00 and subsequently, I was handed a sheet of paper that indicated I owned "5 units" in the LLC. It was a rather plan document. I was accustomed to the traditional stock certificate with its fancy design. The piece of paper I was handed in exchange of my $150,000.00 check was almost as impressive as the return on my investment. It was yet another hard lesson in life. So, it may serve you best to structure your new venture as a c-corp. Rather than wasting your time trying to overcome this resistance with investors, it's better to structure your company as a c-corporation.
If you want to set up a single-member Texas LLC, but you live in a state that requires two or more members, you're in luck! Texas only requires one member! All of the shelf c-corporations and LLCs we offer through Westwood Associates, LLC were formed with a single director (c-corporations) member (LLCs).
Other things need to be considered as well. What if you'd like to provide extensive benefits to owner-employees? Things like a company car, expensive account, health club memberships, etc. Often, when you form a c-corporation, you expect to be both a shareholder (owner) and an employee. The corporation can, for example, hire you to serve as its C.E.O. and pay you a tax-deductible salary. From a tax standpoint, this option is far better than paying you dividends, which can't be deducted by the corporation as a business expense and therefore wind up being taxed TWICE. But corporate employees (including employees of a c-corporation who are also owners) don't just receive pay - most also receive 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. (read: YOU!) Having your own corporation pay for these fringe benefits and then deduct the costs as a business expense can be an attractive feature of doing business through a regular c-corporation. These opportunities for you to receive a tax-favored fringe benefit are somewhat reduced if you do business as an LLC. Moreover, a c-corporation may be able to offer better retirement benefits or options under a corporate retirement plan. You want to entice or keep key employees by offering stock options and stock bonus incentives. Simply put, LLCs don't have stock. Corporations do. While its possible to reward an employee by offering a membership interest in an LLC, the process is awkward and likely to be less attractive to employees. Therefore, if you plan to offer ownership in your business as an employee incentive, it makes sense to incorporate rather than form an LLC.
The best course of action when making this decision of course is to seek out the professional advise of a Texas corporate attorney as well as that of a Texas CPA. It is money well spent. This is a huge decision you need to make and you must perform diligent research before committing to either a c-corp or an LLC.
For additional information, please feel free to contact me:
Allen T May
cell: 214-893-2623
email: allentmay@gmail.com
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