My friend and I are starting a business. How do I know whether we should form an LLC or an Inc?
You should consult a business attorney and they will advise you as what whether you should be an LLC, S-corp, or C-corp.
Chris, this is general advice, but if you have a partner who is not your spouse, you will more than likely be best suited with an LLC. You should consult your tax professional or legal professional. A C-corporation is not a likely entity for a start-up business, in most cases.
If the business owns real assets(ie. Real Estate, Buildings, Equipment) you typically look at an LLC. If your business is "Income Producing" but doe not own a lot of real assets(ie. intellectual property, subscribtion services) you would look to incorporate. If there are more than one owner and if they are related to you will all need to be considered. Seek an experienced professional(I used my CPA) to at least get you established and functioning correctly.
I've founded, grown, and sold a company before, and we were an LLC. The form was quite useful when we wanted to split profits differently from having managerial control. Given what I know now, though, I might have structured it differently.
However, with that in mind...
The advice about attorneys is great. I have an interview with the attorney who guided us through the sale of our company here: http://www.hullfinancialplanning.com/entrepreneurs-and-attorneys-an-interview-with-patrick-asplin-esq/
Some people go crazy with being sucked into thinking that they need a Nevada or a Delaware corporation when their business, customers, and vendors are all in North Dakota. That's fallacious. My friend Mark Kohler has an awesome book about this: http://markjkohler.com/about-the-book-lawyers-are-liars/
A lot of startups go nuts with paying a ton of money to create this complicated legal structure when they haven't done anything yet. It may be a less expensive proposition to start out as a DBA and see what happens. If you have no customers, you're just a startup in the IRS's eyes anyway, so why complicate things?
DO make sure that you have appropriate insurance, either an umbrella policy which covers you in case something happens (someone's cat swallows your prototype widget and chokes and you get sued by Fluffy's owners) or business liability insurance.
It's probably worth your time to spend the couple hundred bucks necessary to have an hour's consultation with a good, reputable attorney regarding this situation. All of us can give you general advice, but we can't tell you specifically what to do with your situation, whereas an attorney can spend the time required to provide counsel on your particular set of circumstances. You don't want to be cheap and try to get the advice over a cup of coffee, because if you do go somewhere with your business, you don't want to be labeled the cheapo who never pays for good counsel and service.
What would I look for in a good attorney?
a) Someone who has guided startups through the foundation, growth, and sale of their company. b) Someone who has worked with private fund raises (in case you're thinking about raising capital) c) An attorney who's willing to give you both good AND bad references d) An attorney who's going to give you cost-effective legal counsel. Note, this doesn't mean the cheapest legal counsel. Sometimes you have to spend money now to save money later.
I have some startup stories and interviews here: http://www.hullfinancialplanning.com/category/small-business-success/
Good luck! Come back in a year and tell us what's been happening with you!
My suggestion is to think about your exit strategy as you start this business. Is this a company you want to run forever and pass on to family or is it something you want to build value in over a few years and then sell? When you meet with someone to discuss the possibilities this will be one of the important factors. In general an LLC is going to be easier to operate but there may be some benefits to going C Corp depending on your business. You will need to sit down with an attorney that can help you register your company but if you go through these thoughts first it should help the conversation.
So here are a few thoughts for you about the different choices:
C CORP: This is the general structure of most public companies, but generally not ideal for a privately-held company due to the double taxation issue. In a C corp, if you earn money, the corporation pays corporate tax . Then if you want to take money out, you dividend out profits, on which you need to pay personal income tax.
S CORP: Free of double taxation as profits in an S Corp flow through to the shareholders. The drawback of an S Corp is that you can only have one class of stock. Pretty inflexible.
LLC: LLCs (electing to file as a partnership for tax purposes) avoid double taxation as profits pass through to the personal tax returns of the Members. Additionally, you can have multiple classifications of members, with different economics. Very flexible.
LLCs and S Corps can always convert to a C Corp without triggering taxes, generally via a simple election, but your cannot convert from a C corp to the others without liquidating the C Corp, which often results in a taxable event to the owners.
I hope this helps! FYI, though comments from everyone here may be helpful, ALWAYS retain an attorney to advise you on any of these decisions.