Victor Elgort, a senior partner at law firm Norris McLaughlin, P.A., specializes in corporate law, and spends a good deal of his time helping entrepreneurs to set up their new ventures. “Everybody is so focused on the need to get up and running that they don’t take the time to think about long term consequences,” he laments. And when problems arise, he adds, “it’s often too late to un-ring the bell.”
One of the first choices an entrepreneur has to make is that of the legal form his business will take. Is it better to make the new venture a corporation or a limited liability company (LLC), or maybe a sole proprietorship? Or does it even matter?
No matter what the business, there is an urgency to pin that first dollar to the wall — whether literally or figuratively. Slow down just a little, is Elgort’s advice. Setting up the business properly from the beginning can save untold dollars down the road.
While the possible permutations are endless — “No two businesses are ever the same,” stresses Elgort — there are some guidelines that apply across the board:
Check with your licensing board. “Professionals are subject to regulations by state or federal agencies,” says Elgort. These agencies establish a list of permissible forms of business entity. “There are 22 or more different regulatory agencies governing licensed professionals,” he says.
Look past New Jersey. Elgort recently helped a real estate broker form a business that will have offices in northern New Jersey, southern New York, and eastern Pennsylvania. Each state has different regulations governing the establishment of a real estate company, and the entrepreneur has to conform to all of them.
Take the long view. “When a person is thinking of establishing a business,” says Elgort, “he is focusing on taxes, liability, and insurance.” That is all well and good, but, he asks, “what about asset protection, wealth transfer, bringing children into the business?” In setting up a business, think past the first year or two, and try to consider as many future scenarios as possible.
Give the LLC a good look. The LLC is relatively new. In fact, the first one was formed in New Jersey just about 10 years ago — by Elgort. “It was part of Christie Whitman’s bid to make New Jersey business-friendly,” he says of the legislation that brought the LLC into being.
In his view, the LLC, which has most of the advantages of a corporation, but is more flexible, and easier to administer, did, in fact, give New Jersey a business edge. In most respects, for most businesses, it is the way to go.
Don’t worry about an LLC’s acceptance. There was a time when banks hesitated to lend money to an LLC, and other companies may hesitate to do business with them. There was a perception that an LLCs freed owners from liability. But that is not the case. There are a number of reasons for choosing an LLC, but counting on it to act as a shield against all liability is not one of them. The LLC’s owner is on the hook for any obligation for which he gives his personal guarantee. In the real world, that covers just about everything. Letting banks know this, says Elgort, was all it took to make them comfortable with LLCs.
The LLC does offer some liability protection, though. Suppliers, says Elgort, may not have the clout to demand a personal guarantee. So, should a business go under, its owner might not be personally liable for business supplies and the like.
Choose a corporation when an IPO is in the future. One of the times when a corporation can be a better choice is the case where a new company is quite sure that it will be going public.
When in doubt, go with an LLC. It is easy to convert an LLC to a corporation, and the consequences generally are tax neutral. The converse is not true. When a corporation becomes an LLC, “the tax consequences can be dramatic,” says Elgort. “Essentially,” he says, “you are liquidating the corporation.”
There are often ways to mitigate the tax bite, but doing so takes time and expert advice.
LLCs are now the most popular business choice. Leaving corporations in the dust, LLCs are now the top choice with new New Jersey companies. This is so, says Elgort, because they are so much easier to form and to administer, and because they carry substantial flexibility in taxation. A corporation, for instance, has to have a board of directors, officers, an annual meeting, and bylaws. LLCs need none of these things.
But LLCs are free to adopt any or all of these corporate trappings. They can mimic a corporation in almost any way.
A company of any size can be an LLC. It used to be that many one-person businesses would operate as sole proprietorships, but now, even these very small businesses can reap the advantages of an LLC. At the other end of the spectrum, says Elgort, an LLC can be a large company with hundreds of millions of dollars in annual sales.
This article appeared in the January 1, 2004 edition of U.S. 1 Newspaper. All rights reserved. Printed with permission from U.S.1 Newspaper.