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Why Might You Incorporate Instead of Form an LLC?

Posted by Jonathan Krems | Sep 07, 2021 | 0 Comments

For most small business owners, forming a limited liability company (LLC) is the entity of choice for their small business.  However, there are some circumstances in which you might want to incorporate instead of forming an LLC for your small business.  In today's Freedom Friday blog, I want to share with you three reasons why you might incorporate instead of forming an LLC.

1.  Large Number of Owners

The first reason why you might incorporate instead of form an LLC is your company has a large number of owners.  For an LLC, the more members that you have, the more complicated the LLC structure will be.  For example, let's start with a single-member LLC, where the sole member (owner) is the member and manager.  The single-member LLC is a simple LLC structure and easy to manage for the sole member (owner).  Next, take for example a two-member LLC, perhaps a company owned by a husband and wife, which is very common.  The operating agreement for this LLC will need some tweaks to handle such situations if the couple divorces, or if the husband and wife dies.  However, a two-member LLC is still a relatively simple LLC structure and easy to manage.  Now look, for example, at a three-member LLC, usually owned by three business “partners.”  An LLC with three or more members will have a more complex operating agreement.  The operating agreement will need to address whether the LLC is a member-managed LLC or a manager-managed LLC.  For more on that issue, check out my previous blog here: http://www.libertylegalok.com/what-does-member-managed-vs-manager-managed-mean.html  Also, there will need to be a sophisticated buy-sell agreement between the LLC members to address various contingencies.  For more information on buy-sell agreements, check out my blog on the issue here: http://www.libertylegalok.com/what-is-a-buy-sell-agreement.html  Lastly, if your LLC has four or more members, you may wish to look at whether a closely-held corporation might be a better fit for a business structure.  In fact, the more owners of any company, the more you might wish to incorporate instead of form an LLC for your small business.

2.  Outside Investment or Venture Capital

The second reason why you might incorporate instead of form an LLC for your small business is that you're looking for outside investment or venture capital.  Most small businesses do not look for outside investors to help them get started or need venture capital.  Similarly, most venture capitalists or investors do not seek to invest in most small businesses, especially if a small business is structured as an LLC.  Most venture capitalists and investors seek to invest in corporations, because a corporation will issue stock (even a closely held corporation).  This is even true with tech startups, because tech startups are usually structured as a corporation, not as an LLC, for this very reason.  So, if you are looking for outside investment help or venture capital, then you might want to incorporate instead of form an LLC.

3.  Incorporation is a Better Industry Fit

I already mentioned above that tech startups are often structured as a corporation instead of an LLC so that they can attract outside investors and venture capital.  There are also other industries in which it might be a better fit to incorporate instead of form an LLC.  A major example is the cannabis industry.  In Oklahoma, medical cannabis has been legalized.  However, cannabis is still illegal federally, and as such there are significant tax consequences.  In this particular industry, there are actually tax advantages to a C corporation structure, and so for the cannabis industry, incorporation might be a better industry fit as a business structure than an LLC.

If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected].  For more information about Liberty Legal Solutions, LLC, please visit our website http://www.libertylegalok.com.

About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...

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