When selecting the kind of legal entity to create, tax is obviously a very important consideration.
But it's not the only factor to consider. Legal factors need to be considered as well.
One of the biggest ones is formalities. There are different legal formalities for establishing and maintaining different types of entities. And of course, there are costs associated with these entities, both in creating them and on an ongoing basis.
First, certain documents have to be filed with the state as part of registering a legal entity. Then, all legal entities must file and pay a registration fee every year to stay current.
But corporations have more formalities than any other legal entities. Here in Georgia, corporations have an additional requirement that before being registered, a notice has to be published in a certain newspaper.
Corporations also have to deal with the most formalities on an ongoing basis. For example, corporations are required to have a board of directors, hold annual meetings and keep track of meeting minutes and corporate resolutions.
These formalities are required by law even if the corporation only has one shareholder!
An LLC has fewer formality requirements than a corporation, but more than a partnership. The only way to avoid formalities altogether is not to form a legal entity at all, but that would come with the risk of unlimited liability (which I'll cover in my next post).
Got any questions about this? Let's chat.