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With So Many Options Available What Type of Company Should You Register?

So many people in here keep spouting out “Delaware LLC bro” and whatnot without realizing the pitfalls and benefits to certain formation styles, so here are the basics:

  • Sole Proprietor: The most basic of businesses. Not incorporated, no civil liability shield or tax benefits. If someone sues the business they are suing you and you can literally lose everything. Can use a DBA or your own name.

  • LLC: Limited Liability Company. A newer type of entity that came into existence in the 1980s in the US based on the GmbH in Germany. These offer the simplicity of a sole proprietorship or partnership when it comes to paperwork, with civil liability protection and the ability to shield the members from lawsuits. LLCs do not have shareholders, they have members, which are outlined in the operating agreement. LLCs can also elect to be taxed as S-corporations or C-corporations if they so choose. Classified as “self-employed” typically for small businesses. LLCs are often used by larger companies as liability shields as well. See Walmart for example. Walmart Inc. has a wholly owned subsidiary, “Walmart Transportation” which is their trucking and shipping of goods. This shields the parent company without incurring additional tax issues. Members are not required to be US citizens. May be owned by a corporation.
  • S-Corporation: A “small business” corporation. Pre-dates the LLC, but newer than the “old fashioned” corporation. Offers civil liability protection like an LLC, but has more paperwork (annual meeting, minutes, share issuance etc). Must have a board of directors, even if one person acts as the entire board. Requires even the owners be on payroll. Shares are issued rather than membership. These are beneficial for tax reasons often as small businesses can avoid higher FICA taxation by paying themselves a lower salary and taking the rest as a profit. Can have up to 99 shareholders, and shareholders must be US citizens. Corporate shareholders and partnerships are generally excluded. However, certain trusts, estates, and tax-exempt corporations, notably 501(c)(3) corporations, are permitted to be shareholders
  • C-Corporation: The big boys or people seeking VC/Angel investment typically. The most paperwork requirements, much more filing and accounting work. You are no longer self-employed at this level, you are an employee of Whatever Inc. Double taxed – this is where the corporate tax comes into play. May have unlimited shareholders and shareholders are not required to be US citizens.
  • LLP: Typically used by law firms, architectural firms, etc, Limited Liability Partnerships shield partners from the negligence or civil issues of the other partners. Similar to an LLC in a way, but the entire LLC would be held liable whereas a specific partner can be liable in an LLP.
  • PLLC: Professional LLC. Specifically for doctors, lawyers, accountants, and other professionally licensed firms. This is like a normal LLC, but allows professional licensure to be granted to the LLC itself. Many states will require a PLLC be used if a company is formed for these purposes. There are also PLLPs in some states which basically combine LLP/PLLC.

Are some states better than others?

A lot of people love to puppet Delaware around because they know major corporations use it for a reason, but those reasons will not benefit your little single member LLC at all.

  • Delaware: Good for C-corps. Has the chancery court and no state-level income tax is leveed on companies. There are high fees for compliance, however. Anything other than a C-corp intending to get very large, go public, or seek VC serves no purpose to form in Delaware and you are wasting your money.
  • Nevada: Relatively cheap. Easy to file in, good privacy protections in place. Fast filing (less than 1 week from time of filing online to entity formation). Nevada does not share information with other states on revenues, banking and other company issues, so take that as you will.
  • Wyoming: Up and coming! All the same as Nevada, but cheaper!
  • Alaska: Are you a high credit business for whatever reason? Alaska may be your best bet. Alaska companies receive extra protection from creditors. Companies may not be dissolved in state courts due to unpaid debts like they can in other states. Companies that finance their receivables may find this useful if shit hits the fan.
  • Your Home State: 9 times out of 10 for the small business, this is your best bet with an LLC. Why? Because having an out of state company means you will have to file as a foreign entity in your state of operations, which will incur you another filing fee and extra headaches. Unless your accountant or lawyer has recommended otherwise for tax or liability reasons.

What about going offshore?

99% of the time I will say no. There are plenty of benefits to offshoring however that don’t involve dodging your taxes. Here’s an example:

  • Bob owns a very successful business, and profits millions per year. Unfortunately his relationship with his wife is rocky, and she plans to file for divorce and will try to “take him to the cleaners”. If Bob has an offshore trust and LLC set up to hold his funds (and complies with tax law), her attempt to sue him for funds will most likely fail. If set up properly, the judge can demand Bob get money out of his offshore accounts. Bob can agree to try, but his own trust can deny him access for this reason if set up correctly, making it impossible for the now ex-wife to claim any of his assets.
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2 Responses to What Type of Company to Register?

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