Inc., LLC, S-Corp Ahhh! Which entity to be?

I first looked into this whole issue of what little abbreviation goes after a company name a few months ago – less for purposes of becoming a real business entity, and more for purposes of looking legit. I thought to myself, the company can’t just be MIXTT. It’s got to be MIXTT, Something. MIXTT, Inc. That sounds nice. Maybe I could just stick the “Inc” on there and be all set?

Of course, not so fast. All those little Incs and LLPs and LLCs mean something, and have thick volumes of legal code and literature behind them – not to mention fees and taxes as well. I did some research, and here’s the quick and dirty of what I found out:

  • Sole Proprietorship – I don’t think you get to put an abbreviation after your company name on this one, but it’s the simplest and easiest thing to be. In fact, if you’re fine running your business out of your own bank account (with your own name attached to it), you don’t have to do anything, and your business is automatically a Sole Proprietorship! Great. And, if you do want to be “more official” (and probably more organized) by giving your business its own little box at the bank, you just file a petition for a Fictitious Business Name (e.g., Eve Peters d.b.a. MIXTT) with your county for a small fee, and you’re pretty much set after receiving approval. As with any kind of business entity, you have to make sure that your business name doesn’t infringe the trademark of a pre-existing business in your county; and also have to run a few announcements in a local newspaper announcing the existence of your business (sounds old school, doesn’t it?).
    • Pros: Simple, cheap, no extra minimum mandatory income taxes (more on that below), business can get its own books.
    • Cons: No personal liability protection (lawsuits are so darn posh these days), self-employment tax, no abbreviation to make you look like the real deal.
  • LLP – Limited Liability Partnership. Luckily I got to skip this one. In the states of California, New York, Oregon, and Nevada, LLPs are reserved for accountants, lawyers, and architects. Hallelujah. Happy to leave the LLP for another life.
  • LLC – Limited Liability Company. An LLC is often a good bet for a small business with just a few owners. It’s the less restrictive version of a formal corporation. An LLC provides the liability protection of a corporation, and – as long as it’s classified as a partnership – shields the company from double-taxation (which a C-Corp does not). In plainer English, if someone is owed money by your company, he can go after company assets, but not the personal assets of the company owners. As for taxes, company earnings and losses are passed onto the members’ personal income taxes; they are not filed separately/corporately.
    • Pros: Simpler administratively than an Inc.; no need for Board of Directors/Officers; fewer rules and regs than an Inc.; provides liability protection; offers pass-through taxation/ choice to be taxed as S-Corp or C-Corp
    • Cons: Can’t go public; annual franchise tax (minimum $800 annually in California); requires partnership for tax advantages and in some cases for liability protection
  • Inc. – Formal Corporations. Incorporating is the most well-established way to make a business a separate entity from its owners. A formal corporation is actually considered a citizen of the state in which it was incorporated. Formal corporations are subject to the most extensive list of rules and regulations concerning their governance – meetings, record-keeping, management structures, etc. There are two types of corporations:
    • C-Corp: The entity pays a corporate tax, and the shareholders pay income tax on the distributed profits/dividends. This is called double taxation. I doubt there are many people who like the sound of that. However, the upside is in the flexibility of the tax and ownership structures.
    • S-Corp: The entity does not pay a corporate tax. As in an LLC, earnings and losses are passed through to the shareholders, and they pay personal income taxes. The drawbacks (for some) are the limits on shareholders: no more than 100, must be individual U.S. citizens or residents, and there can only be one class of stock.

Pros and Cons of formal Corporations

Pros: Profits not subject to Medicare and Social Security taxes; well-established and trusted business entity (in the eyes of creditors and investors); ready to go public; variety of fringe benefit plans to offer; income shifting for (potentially) lower taxes.

Cons: Required, formal board and shareholder meetings and minutes; annual state reports; double-taxation (C-Corps); more paperwork; more likely to need an accountant to figure your taxes out.

      I think, to start off, the best bet for MIXTT is going to begin as an LLC. It will allow the liability protection and tax advantages that I’m looking for without the complexity of making a formal corporation.

      We’re up (a little bit)!

      Well . . . just barely. Given how much time and effort we poured into the initial design and subsequent re-design of MIXTT, I consider the existence of our “Coming Soon” page pretty exciting. It means our look is defined, and we’re well on our way to getting the actual site off the ground. You can go to www.mixtt.com and sign up to be on the email list for our invite-only beta launch this spring. It’s going to be completely free and not binding in the least, so you have nothing to lose!

      I really wish I could stop being so vague to everyone about what exactly MIXTT is and start relating why I’m so excited about it, but these days, anyone with the right skills can take a good Web 2.0 idea and turn it into a live reality in a matter of weeks, maybe even days. And, especially seeing as this is my first entrepreneurial project, I don’t want to run that risk.

      What I can say now is that MIXTT is a social networking/online dating hybrid that provides a really cool way to meet people in your city. More date-functional than facebook, more chill than Match.com, and a lot more fun than either. Don’t get me wrong, facebook is fantastic – and I’d be the last to knock it – but MIXTT fun is built to carry into your “real” life (the one away from the computer). I think there’s a lot to be said for that, and I can’t wait to get this thing rolling.