Choosing Business Entity Should Not Be a Popularity Contest

Everyone has an opinion and they are passionate about what kind of legal form your business should take.

Get a group of business owners together in the same room and the fur really flies on this issue. I know I have done this.

Ask a lawyer. They will usually say: “You must be an LLC.” (As my mother would say, “Maybe they are poets and don’t know it.”) Why? For liability’s sake.

My question: If you don’t have enough high dollar assets worth protecting, is this really the right choice? Especially since there is limited case law (dating only back to 1977) on Limited Liability Companies in comparison to…

The accountant’s traditional business entity favorite: The Corporation. It used to be they swore that the Sub S or S Corp entity was the place to be. Why? Taxes, of course. That is, unless you needed to keep the profits in your company at the end of the year. Or if the US Congress hadn’t kept taking away all the reasons to choose it over other forms.

Now a regular corporation, sometimes called a C-Corp, straight C or an LLC is the business entity flavor of the month. And, there’s always the PC. No, not a computer but a Professional Corporation, loved by doctors, and lawyers, accountants and licensed Indian Chiefs.

But I want to know: Do you really want all the paperwork and other hassles of a corporation? As the picture above demonstrates, keeping up with this stuff and staying legal so that some smart lawyer can’t pierce your “Corporate Veil” is time consuming and sucks the life right out of you.

Of course, if you plan to raise investment capital, find partners or sell this sucker and get your money out, generally speaking it will be more valuable and easier if you are a corporation. No promises though.

As someone who has spent 27 years helping owners grow their businesses, I want to add my two cents. In small business management, I have found that the two best choices are:

Be the business entity your best customer wants and expects you to be.

Sales and marketing issues may play a big role in your decision and impact your success.

Behind closed doors, Dell Corporation will admit that they want their suppliers to be corporations, too. They don’t want to deal with 1099 tax forms and they don’t really understand sole proprietorship businesses all that well.

You may find this true of status-conscious consumers, other very large businesses or often smaller ones who just feel a corporation or LLC is less likely to fold. (Check with Lehman Brothers customers about this.)

Be the business entity you want to be.

Except for the fact that legally you cannot choose to call yourself a Partnership unless you have at least one other person who owns part of the business, you can be anything. You can decide what is right for you.

You can always start out as a Sole Proprietorship. In Texas, you don’t have to even register it although there are some cities that require home-based businesses to register. Then later you can move up the legal formation model to Corporation or LLC. You can move back from being a Corporation to a less complex form, but it is harder. Just ask your lawyer.

I know you don’t want to forget about taxes – including state taxes. Texas says it has no business tax, except it has the Margin Tax, aka Franchise Tax — these are not just for franchises either. Rule of thumb, the simpler the cheaper. So, again a Sole Proprietorship might still be a good choice. (Also good for being able to deduct your health insurance.)

And, what about those liability issues that get most people stirred up? I don’t sell insurance, but I know from working with clients who have legitimate concerns, that generally like the ad says, “there’s an insurance for that”. This could be cheaper than choosing a more complicated business form when you add in the costs of maintaining the records and fulfilling the other requirements of a corporation, for instance.

In the end, what matters most is how you see yourself and how you want to world to see you. There are always trade-offs. Listen, evaluate what you hear and read but choose for yourself.

I like being an S Corp, I think of it as “Status Corp” that I have earned through the professional way I run my business and help others run theirs the right way.

So now, that you have heard my side of the story, what is your take? How did you decide?