“Fall Business Fashion: Out with the Corporation, in with the LLC!!!”

Why Small Business Owners Constantly Choose The Wrong Legal Entity

By: Matthew C. Hagerty

What seems to be a common theme in my office is the presence of small business owners and recent entrepreneurs in disarray.  The ever-trying individual, entrepreneurs routinely pour their heart and soul into their business projects, only to run into legal roadblocks at every corner with near certainty.  I’m filling up my proverbial legal rifle and aiming right at you, small business owner; lets get a few things straight, especially when it comes to what legal entity you choose.

Far and away the most common discussion I have with people who want to start a business is one that involves choosing the right entity.  Over the course of numerous similarly toned conversations, I’ve noticed items that crop up time and time that I’d like to address.  What follows is a prototypical lawyerly-numbered list, with not-so prototypical answers.

1.   When Seeking Legal Advice, Ask An Attorney (Not An Accountant). 

While this may seem incredibly logical and obvious, one would be surprised how many people turn to their accountant for legal answers.  Many accountants, I’ve come to learn, feel they possess the tools necessary to navigate the “small business” legal landscape.  While it may seem like a routine process, it really isn’t in many cases.  I file my taxes every year with the use of an accountant, a seemingly mundane and routine task for an accountant.  Do I, as an attorney, feel that because it is “seemingly so mundane” that I can do it on my own?  No, sir.  Hire an attorney for your legal questions, not an accountant.

2.   “I’m starting a clothing shop down on Fremont, so I need to incorporate right?” “Wrong.”

For whatever reason, people constantly feel they need to incorporate in order to be doing business “correctly.”  Whether this is the result of an accountant giving legal advice (see my feelings above), an older attorney’s opinion that is unfamiliar of that new kid on the block known as the LLC or because they want “Inc.” in their name, it is highly unlikely that you need to incorporate!  “Matt, but all of the huge awesome, profitable and cool businesses are corporations!”  Wrong again.  Zappos (an on-line shoe and apparel God), MGM (yes…that MGM), and Zuffa (who “does business” under the name Ultimate Fighting Championship) are all LLC’s.  “Oh…” you say, yeah…let us take a look at it, shall we?

3.   The LLC has more benefits than my Uncle’s American Express Black Card. 

For starters, it’s cheaper!  The fees you’ll pay to the Nevada Secretary of State won’t save you bundles of money, but the fees you’ll pay to me will.  Operating Agreements (the document that governs your LLC), on the whole, are cheaper and more affordable to draft in a BIG way than Bylaws (the document that governs your corporation).

You. Don’t. Need. It.  Corporations are incredibly comprehensive and difficult entities to understand, even for attorneys.  Unless you plan on going public anytime soon (which most of you don’t), you don’t need a corporation.  A corporation offers you no more liability protection than an LLC offers you; you cannot insulate yourself from danger because your company has “Inc.” at the end of its name.

“Taxes!  Ha, got you there!  Taxes are better with an S-Corp!”  Sorry Charlie.  You can elect to have your LLC taxed as an S-Corporation with the IRS.  In fact, it only requires filling out a two (2) page document and popping it in the mail.  Bubble busted.

There are also a myriad of “legally cool” things you can do with an LLC Operating Agreement that you can’t do with corporation Bylaws: disconnect voting rights from equity, create “Phantom Equity” payments for those who contribute something other than capital for the business and many others.

When you consider the fact that the Nevada Secretary of State has an almost instantaneous turnaround time with the organization process, is arguably the number one state in terms of business privacy, has courts specifically for business disputes and oh, also has no income or business taxes, it’s a pretty nice environment to start an LLC in!

4.      Conversion is Easier Than Updating Your Facebook Status.

Okay, so maybe it isn’t that easy, but converting your LLC to a corporation when you finally do reach publicly-traded-billion-dollar-awesomeness is not a horridly difficult process from Nevada’s perspective.  Yes, there will be a lot of Bylaw paperwork.  Yes, there will be a stack of documents the size of a phone book related to public trading.  The actual filing, however, with the Nevada Secretary of State is two (2) pages, and the Conversion Plan necessitated to be kept on file is a relatively painless document.  That being said: starting with an LLC is not a prohibitive step if you end up need that corporation after all!

All in all, the majority of the small business owners out there really only need an LLC.  I highly recommend talking to an attorney about business options, and if they present you with a corporation, feel free to ask them why!  Second opinions are often free as well; so don’t be afraid to shop around.  Set yourself up with a business entity that you understand, is affordable and offers you that same amount of protection as a corporation, with the ability to retain more creative control; or in the alternative, humor me, and look into starting your business with an LLC.