I came across an article today which outlines the benefits of a limited liability corporation (LLC) and also the drawbacks. Simply stated an LLC allows earnings or profit to flow through to the owners but this structure means you cannot issue stock as flexibly. If you want to grant complex stock options or even get VC funding this may not be the best direction to go in. An S corporation too has a flow through nature meaning profits are taxed at the owner’s tax rate.

BTW a typical C corporation has its profits taxed at the corporate tax rate and then the owners are taxed again at the individual rate when they take the money out.

This by the way is why when taxes go up on individuals in higher income brackets, less money is available for investment which means hiring suffers. You see most small businesses are S corporations or LLCs. In fact it seems the stubborn unemployment rate in this country is directly correlated to the increase in SMB tax rate our government has now handed higher income individuals.

As always you should consult a financial and/or legal professional about these issues before setting up a company. Good luck!