Your entrepreneurial spirit is bursting with excitement over your idea for a new business. But where do you begin to execute this great new idea? According to Leah Jensen Bennion of Jensen Bennion Law, PLLC, a bit of work up front can save you time, money and heartache. Your choice of a legal entity is an important first step. Two primary factors to consider:
Many people like the idea of setting up a Limited Liability Company (LLC), because it is a “pass-through entity,” meaning you are only taxed on your personal income (note: S corporations and Partnerships are also pass-through entities). Corporations, on the other hand, are taxed first at the corporate level, and any dividends are taxed again at the shareholder level -- this is frequently called double-taxation. So you are probably thinking, “But Leah, it’s simple. I’ll just file the short document with the state to set up an LLC (the articles of organization) and then I’m good to go, right?” Not exactly.
LLCs were invented primarily to give parties the freedom to contract while still avoiding double-taxation. For corporations, the legal requirements and protections are enshrined in statute and court cases. On the other hand, for LLCs these are largely left to a contract called the “Operating Agreement.” Instead of relying on statutes for legal protection, the “laws” for the LLC are drafted into the operating agreement. Without an operating agreement, an LLC is like a
straw house—when trouble comes (and it will) the whole thing crumbles. A personalized operating agreement is crucial for an LLC. Of course, there are other considerations including raising money, issuing equity, and protecting intellectual property. Institutional investors, for example, strongly prefer a corporate structure. A good lawyer can help you draft legal documents to protect you and set you up for success, so you can focus on growing your business.
Jensen Bennion Law
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