In creating a start-up, it is important to form the business as the type of legal entity that best suits its needs and goals. Because there are numerous forms of entities to choose from, each with their advantages and disadvantages, choice of entity can be, absent expertise, a daunting task.
The three most common types of entities to choose from are Corporations, Limited Liability Companies, and General Partnerships. Often, the manner in which the start-up is to be funded is a primary factor in entity selection. For example, if you are seeking funding from family, friends, or angel investors, it makes sense to form as an LLC. This is because an LLC is a “pass-through” entity: it does not have entity-level taxation. In other words, it is the responsibility of the LLC’s shareholders and members to pay taxes on the entity profits relative to their respective ownerships portions. In addition to this single layer of taxation, LLCs are also an attractive choice because an LLC’s owners, or “members,” are not personally liable for the debts of the company.
Some of the most famous companies in the world began as start-up LLCs: