From the December 2007 issue of Startups

Question: I'm starting a business and want to limit my legal liability as much as possible, but I can't decide if I should make my business a limited liability company or an S corporation. Is there a right answer in this case?

Answer: The short answer is no. All legal entities involve trade-offs--to get more of X, you have to live with less of Y. You'll need to talk with your lawyer or accountant to determine which legal entity is right for your business. There are, however, a few details to think about before you decide.

Generally, you should consider an LLC if:

  • There's a low risk that your business will be sued.
  • You want to operate your business informally, with minimal paperwork.
  • You don't want to spend a lot of money setting up your company.

You should consider an S corp if:

  • There's a high risk that your business will be sued.
  • You plan on hiring many employees and providing them with benefits.
  • You want to reduce the amount of employment taxes (FICA, FUTA and Medicare) taken out of your income.
  • You plan on raising outside capital (e.g., from VCs or angel investors) to fund your business.

Still confused? Go cliffennico.com and click on "Not sure whether your business should be a sole proprietorship, limited liability company or corporation?" A five-page document called "Demystifying the Business Organization" will pop up. It's absolutely free and will answer most of your questions about LLCs, S corps, and the advantages and disadvantages of each.

Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Seller's Tax and Legal Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.