The Choice-of-Entity Dilemma
A successful capitalist and well-regarded law professor, once quipped, “Any attorney who advises his client to form a corporation, instead of an LLC, should be disbarred for committing malpractice!” It’s worth mentioning, that this heated proclamation came after a long dinner, which was served with a healthy accompaniment of wine. And while the inference of malpractice was clearly hyperbole, it drives home the point: why would a startup form as a corporation when an LLC provides the same protections and yet eliminates the bureaucratic limitations of a corporation?
The “choice-of-entity” dilemma is a decision that concerns all entrepreneurs from high-tech SaaS CEOs to neighborhood restaurant owners. It has enormous impact on operational strategies and business expenses—especially as the company grows. Some entity characteristics might appear inherently beneficial or detrimental at first glance, but deeper analysis often reveals that these characteristics depend on the ultimate goals of the entrepreneur and of the business.
This article – the first in a short series of articles covering different aspects of the choice-of-entity dilemma – provides an overview of high-level differences and legal distinctions between three most common choices for startups: C-Corporations, S-Corporations, and LLCs. Subsequent articles in this series will take a deeper look at specific examples, exploring how the choice-of-entity will affect tax expenses and operations conduct. At the conclusion of this series, you will find a poll: letting the readers decide whether attorneys who advise their clients to adopt the C-Corporation structure should be subjugated to mock and ridicule amongst their peers.