Start-up founders often find it tough to choose the ideal corporate structure. Traditional C-corporation status provides the protection of limited liability for shareholders, but at a cost of double taxation of earnings -- at both the corporate and shareholder levels. S corporations combine limited liability with pass-through tax treatment at the corporate level -- losses and earnings pass through the company to the shareholders -- but have so many restrictions that many companies find it difficult to comply.
Well, there's a new alternative: the Limited-Liability Company (LLC), a business structure now available in eight states: Colorado, Florida, Kansas, Nevada, Texas, Utah, Virginia, and Wyoming. "LLCs combine several advantages: limited-liability protection for owners, pass-through tax treatment at the entity level, and -- unlike S corporations -- tremendous organizational flexibility," says Brian Schorr, a partner at Paul, Weiss, Rifkind, Wharton & Garrison, in New York City. According to Schorr, interest in LLC legislation has been expressed in more than 30 states.
"We wanted to run our store cooperatively, which suggested a partnership, but we were afraid of the liability risks we'd assume if we opted for a traditional partnership status," says Carine Ullom, one of the owners of Simple Goods General Store, a Lawrence, Kans., retailer of environmentally safe products, which is set up as an LLC.
Schorr cautions that LLCs won't fit every company's needs: "Because of the limited number of states that have enacted LLC statutes, and the lack of case law, companies that do business in a range of states run the risk of encountering a state that wouldn't recognize the limited liability of the partners." But for companies like Simple Goods, which operates only in Kansas, it's a perfect option, and the paperwork is no more complicated than for any other incorporation.
-- Jill Andresky Fraser* * *