Do Businesses Prefer Limited Liability Companies Or Corporations?

Limited Liability Company formations outpace Corporate formations by nearly two-to-one, so the easy answer to this question seems to be that businesses prefer LLCs. However, what works for one, or even the majority, of businesses may not be right for others. Every company faces its own unique challenges and has its own needs, and even though LLC formation is so much higher than corporate formation, that doesn’t mean that every business will be happy with a limited liability company structure.

The main reason behind why LLCs continue to be so popular seems to be the ease in which an entrepreneur can run an LLC, either by themselves or with a handful of other people. Limited Liability Companies don’t require annual shareholder meetings, nor do they need meticulous notes on every debate that leads to a business decision. Corporations, on the other hand, can be a bit of a pain to run and have to contend with plenty of extra state regulations. But what sort of companies find dealing with those regulations worth the benefits of a corporate structure? And what kind of businesses do better as limited liability companies?

Typically, mom-and-pop shops, beauty/fitness businesses, and companies that provide business services all seem to do very well as limited liability companies because these sorts of companies are rarely interested in attracting investors. And, when you get right down to it, the best reason for choosing a corporate structure over a limited liability company is because you plan on trying to find investors.

That isn’t to say that investors will immediately skip over any limited liability companies looking for capital – a limited liability company can sell portions of itself in exchange for membership, and an operating agreement can be written up to accommodate outside investors and VC firms. However, corporations have been around for a lot longer than limited liability companies, and people are generally more comfortable with the corporate structure.

You give the corporation money, receive your share of the company, and that is that – simple. It is also much, much easier for an investor to sell or trade a corporate share than it is for them to sell membership interest in an LLC. Because of that, most investors and firms will prefer to deal with corporations over LLCs. A small, local tire shop will probably not be interested in attracting outside investors. A high-tech firm starting up in Silicon Valley, on the other hand, will depend heavily on outside investment, and will thus want to incorporate.

Limited liability companies can convert into corporations, and if you find that your company is being sniffed by investors, you may choose to do just that. But, if you know for certain you want to have an IPO or attract investment capital, choosing to incorporate right from the get-go might be a better idea.

Do you have any questions on the benefits of LLCs vs Corporations? Or are you ready to choose a business structure? Leave a comment below, or give us a call at 1-877-692-6772!