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Q: I'm in the process of trying to start my own business. How should I incorporate--as an S corporation or an LLC? Once I have my business entity, let's say I open a business, and one year after that I open another business. The second business will not be the same as the first one. (Let's say the first one is a restaurant and the second is a hair salon.) Would I be able to use the second business under the business entity that I formed for the first one, or will I need to form two business entities?

A: This is a very common question for new business owners. Let me begin by explaining what each type of entity is.

An S corporation is a corporation that is taxed under Subchapter S of the Internal Revenue Code. A corporation is a legal and tax entity by itself. It is similar to a person in that it has its own assets and a social security number, called a Federal Tax Identification Number. The shareholders of a corporation must agree to elect to be an S corporation, which provides tax benefits shortly after incorporating.

The primary advantage of forming a corporation is that it is a separate legal and tax entity from its owner(s). If you form a corporation, the corporation will grant you shares. As a shareholder, you are not liable for the debts or acts of the corporation as long as you abide by the corporate procedures required by law. The most you can lose as a shareholder is the amount you have paid for your shares. This means that if the corporation is sued and loses, they cannot take your home, personal car and assets. Venture capital and investors usually prefer to invest in corporations, as they provide the most flexible and consistent procedures for business and investment. An S corporation may have no more than 35 shareholders, may have only one class of stock, may not own more than 80 percent of another corporation, and may only have US citizens or resident aliens as shareholders.

A limited liability company (LLC) has characteristics of a corporation and a partnership. An LLC allows its owners not to be personally liable for debts or liabilities of the business like a corporation, but allows the company profits to be passed through to the owners as income tax like a partnership. The owners of an LLC are called members, which are somewhat analogous to shareholders. A member can be a natural person, a corporation, a partnership or another legal association or entity. Unlike corporations or sole proprietorships, which may be formed by only one person, in most states LLCs must be formed and managed by two or more members. The members may run the LLC themselves or through appointment of managers.
As there is no state law structure of shareholders, directors and officers already established as with corporations, and unless the state has other regulations, the LLC members create their operating structure and have an operating agreement. This typically adds additional attorneys fees for drafting the operating agreement, or otherwise increases risk of operating without one or with a poorly drafted agreement. LLCs vary in legal requirements and liabilities by state and do not have the easy of transfer and investment that a corporation structure provides. Therefore, they are sometimes regarded as less preferable to C or S corporations.

When you start additional businesses, you may run them all through one corporation. However, if you do so, all assets and liability are merged. Therefore, if you lose a lawsuit for your restaurant business, the revenues from the hair salon can be used to satisfy the judgment since it's all one corporation, and the corporation is the party that lost the lawsuit. For this reason, it's a better idea to form separate corporations for separate businesses. Also, for trademark purposes, since a trademark identifies the corporate source of goods to consumers, if you have one source of different types of goods or services, you may have more trouble establishing your mark in consumers' minds and/or with the U.S. Patent and Trademark Office.

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