Choosing the right entity for your business is key to future success. Different businesses have different needs, so choosing between a Limited Liability Company (LLC) and a corporation (such as an S-Corp or C-Corp) is a vital step in the process.
Businesses owners regularly struggle with this decision, with each offering its own unique features, regulations, and challenges. We want to help you understand your options so you’re equipped to make the right decision as you start this venture.
The Rights of Shareholders
One of the main differences between LLCs and corporations is the rights of shareholders. In an LLC, you are permitted to divvy up rights and responsibilities more liberally. This control provides greater flexibility for the long road to success as owners (referred to as members in an LLC) change, the business grows (or shrinks), and goals evolve.
Corporations have a more rigid set of guidelines under the law for the rights of shareholders. Ownership is represented by stock, and the laws limit how much control those who do not own 51% or more of the shares have, as well as majority owners (more than 51%). For example, the law only allows directors to be elected by unanimous written consent of all shares entitled to vote for the election of directors – this cannot be changed in the Bylaws or Articles of Incorporation of a corporation.
Certain rights of shareholders are enshrined in law and cannot be stripped away (even through contracts and other governing documents). Compliance with these laws is crucial for protecting your business and avoiding litigation.
LLCs Allow Flexibility in Management Structure
LLCs also provide significant flexibility in the way you structure your management team. Management is able to be distributed freely as you see fit. First, you can elect for your LLC to be member-managed (all owners are managers), or manager-managed (one or more managers manage the business, and they do not have to be owners). In addition, there are generally no rules regarding management and decision-making of an LLC that cannot be contracted around within an Operating Agreement or Articles of Organization. This provides much more flexibility to accomplish the management goals of each unique business.
Meanwhile, a corporation has strict management requirements that govern exactly how management needs to be set up and executed. Corporations need a board of directors that complies with California laws. Failing to follow these laws is a surefire way to stall your business and put everything you’ve worked for at risk.
Corporations Governed by More Strict Recordkeeping
Corporations, both S and C, are not only strictly governed at the management level but also at the micro level. Extensive recordkeeping requirements mean you’ll need a reliable and consistent team to manage all corporate records. This includes financial records, minutes of meetings, and much more.
LLCs do have reporting obligations, but there is more leniency and less recordkeeping overall. It’s still important to track the finances and operating performance of your business, however, to avoid piercing the corporate veil.
Choose the Right Structure with Dahl Law Group
Making the right choice between an LLC and other corporate entities demands a deep understanding of the legal intricacies involved. At Dahl Law Group, our experienced team specializes in guiding California business owners toward the optimal structure for their enterprise. We ensure that your business complies with all relevant laws, sparing you from the worry of fines and other legal complications.Contact Dahl Law Group today to set up your business for success. Your choice of structure is a significant step, and we’re here to help you make it wisely.
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