A new entity: choosing the right structure for a startup.

• Author: Spendlove, Gretta
• Position: EntrepreneurEdge

One of the first decisions an entrepreneur must make is how to legally structure the new business, especially to get the best tax advantages. "As a general rule, it's hard to go wrong with an LLC for a small business," says Troy Blanchard, St. George corporate and tax attorney. LLCs taxed as partnerships, are flexible and can be used for virtually any type of business owner. If, for any reason, a corporate form becomes preferable, it is usually simple to convert an LLC to a corporation or to use "check the box" IRS procedures to have an LLC taxed as a corporation. However, some startup owners may still prefer S corporations to get maximum employment tax benefits.

The Top Choices

"Business owners want to protect their personal assets from liability for business debts. Both LLCs and corporations provide that protection," explains Blanchard. A creditor that sues Newco, LLC or Newco, Inc. for failure to deliver a product on time cannot recover damages from Newco's owner, so long as Newco has been set up and maintained correctly. By contrast, sole proprietorships provide no protection from liability for business debts, and partnerships provide only limited protection.

Owners of startup companies usually want "pass-through taxation," which means that the company pays tax only at the owner level, rather than at both the company and owner levels. LLCs have pass-through taxation, with single-member LLCs being "disregarded entities" for IRS purposes and multiple-member LLCs being taxed as partnerships. The owners of a corporation can also obtain pass-through taxation by making an election with the IRS to become an "S corporation," or "S corp."

Because of those twin characteristics of limited liability and pass-through taxation, LLCs and S corps are favorites of lawyers and accountants when setting up new businesses.

Advantages of LLCs

LLCs taxed as partnerships, are the clear choice of entity for real estate ownership. "You usually can't pull real estate out of an S corp without it being taxed," says Blanchard, For instance, if multiple family members own an apartment building, held in an S corp, and then want to remove it from the S corp, so as to give some members property interests and some members cash, they will be taxed. With an LLC, it is easier to pull real estate in and out, without triggering tax.

Corporations and multiple member LLCs can be owners of LLCs, whereas they cannot be owners of S corps. S corps can only have one class of stock...