I think when a company is selecting between corporation (Inc) or limited liability company (LLC), it needs to weigh the pros and cons against the company’s overall mission. If a mid-size company with 50 people and $10 million in revenue wants to expand globally, then I would agree with bb254 and several of my other classmates, where selecting to become a corporation would be the best path forward. Corporations have the standard management structure, where a board of directors is overseeing the company’s growth, can grow in shareholders, become a public company when desirable, and will have an easier time acquiring loans when necessary. Yet on the other hand, if the same mid-size company doesn’t have the intention on expanding globally, is more of a software-based company, having more of an agile management style, I would argue and say selecting LLC would be best. The management style is more flexible, not requiring specific job titles and can be managed by groups. Each member also owns a percentage in the LLC so it can always motivate employees in an agile environment.
Many who work on medical device projects never really get training in basic business. Those who have business degrees will find this module to be quite elementary, but it is often the case that engineers and scientists never even get this basic material and training on the subject. This is why we cover it here.
To deal with companies it is nice to start from the beginning: what are they? This module talks a lot about that.
For this discussion, think about a medical device company of mid-size with 50 people and $10 million in revenue. What argument would you make to have that company exist as an "Inc." corporation versus an "LLC"?
If you have other kinds of corporation formats in your country, such as they do in the UK, describe them here and lay out the pros and cons.
The argument for having a company exist as an Inc. or LLC depends on the company's funding and growth strategy, along with the number of owners. If a company seeks to be publicly traded, receive venture capital, or grow as an entitity, it is more beneficial for the company to exist as an Inc., rather than an LLC. If company of 50 consists of 47 employees and 3 managing members, than perhaps existing as an LLC might be of more beneficial than being an Inc.. If the company seeks to retain private ownership, an LLC might provide more value to the company than the Inc..
When a start-up is considering entity formation, I think that primary consideration should be (1) taxation, (2) share allocation, and (3) ownership vs non-ownership.
Taxation:
S corp - allows for pass through taxation which results in individual earning being taxed. Single taxation.
C corp - no pass through taxation which results in double taxing of the entity on profits and individual earnings. Double taxation
LLC - can allow for pass through taxation as with a S corp. Single taxation.
Share Allocation
S corp - All shareholders must be US citizens; entity cannot be publicly traded; companies for not allowed to be shared holders. In GA this entity can only allocate up to 100 shares.
C corp - Shareholders can be any person or other company. Seemingly an unlimited number of shares.
Ownership vs Non-ownership
S corp - Business is controlled by share holders, who elect board member, who hire corporate officers.
C corp - Business is controlled by share holders, who elect board member, who hire corporate officers.
LLC - two or more owners/partnership which share control, profit and losses.
In forming a business, using the provided scenario, I would elect to form a S Corp
When assessing the scenario provided, how large of a factor is the $10M in revenue? Because of the taxation structure, I am a huge fan of the S corp.
An LLC is a business structure that offers limited liability protection. It has a flow-through taxation process. LLC’s can choose to be taxed as a partnership or as a corporation. An LLC has a flexible management structure and can be managed by members or a group of managers. Unless otherwise stated, when a member leaves an LLC, the business must be dissolved.
A corporation is considered a separate entity and acts as its own “person”. The owners, or shareholders, have limited personal liability for any debts related to the business. Within a corporation, dividends are taxed twice because they are not tax deductible. Although this is the case, there are many tax deductions specifically for corporations that can offset this cost. A corporation can sell stocks, and is the best option for attracting new investors. When a member or shareholder leaves the company, the company still remains and does not dissolve as in the case of an LLC. The structure of a corporation is formal, and requires a board of directors. Corporate officers are also assigned to handle various responsibilities and tend to be chosen by the shareholders. They are also required to maintain reports and hold annual shareholder meetings, as well as record corporate minutes.
For a mid-size company with 50 employees and $10 million in revenue, I would argue that the company should exist as a corporation in order to raise increased revenue. It is easier for a corporation to raise additional revenue from investors, and they can expand overseas. A corporation can be listed on the SEC, and stocks are an opportunity to generate significant revenue. There is limited liability for all involved, so their personal assets are safe should there be any financial issues. Although corporations are taxed twice, they qualify for certain tax deductions and incentives that may offset the cost of the taxation.
Another benefit is the division of responsibilities. It will be easier to manage day-to-day responsibilities with a board or directors and assigned managers. Any disagreements can be resolved with a vote, and prolonged squabbles are eliminated.
I find that nearly 3/4ths of the people I run into who are start-up companies are gravitating towards the LLC corporate structure, pointing out that they want to avoid double taxes. This is logic is fine if you're running a mom and pop business, but if you have aspirations on becoming a major player in the biotechnology or medical device industry, remaining an LLC does not seem very plausible. First of all, if you are on the IPO pathway, the C-corporate structure is optimal for selling shares to investors, especially if you are implementing levels of stockholder rights (e.g. preferred vs. common stock). Maybe it's my imagination, but from what I've observed, it seems that C-corps carry more credibility with investors and industry professionals than LLCs.
In my own small business ventures, I've always chosen C-corp over LLC. My logic is this; a biotech or medical device company is a risky enterprise. I prefer the maximum insulation of personal assets from risk that the C-corp offers. In addition, all these folks fretting over taxes forget one thing; if I'm spending tons of money on the research and development of a biologic or a state-of-art medical device, I'm probably going to be operating at loss the first year or so anyhow. I know plenty of colleagues who have done just fine on taxes because they can deduct all of their R&D costs and/or get tax credits for their losses. Lastly, with C-corps, establishing business in and across multiple states is more straightforward. In some states, LLC and S-corporation definitions differ significantly in terms of setup and cost.
For a Mid-size company with 50 people and just $10 Million in revenue and did prefer this exist as an INC cooperation than an LLC cooperation and should be taxed under the C-Corp for the following reasons:
1. The ownership is based on stock each shareholder owns as to LLC which ownership is based on investment.
2. When a shareholders leaves or dies in an INC cooperation the company still survive and still continues to function. its very hard to kill of an INC as to LLC which could fall apart if some of the member or silent partners withdraws their investment
3. Every company or Medical device company wants to grow and expand and someday go public; in INC you have the opportunity to go public and sell your shares publicly if they choose to use the double taxation (C-Corp) which the LLC do not have because their stocks can't be made publicly they are limited.
4. Since they are limited to 50 people, and most times small start up organization tend to be very strict with their mission, INC will be the right cooperation to go with than the LLC.
Although there are many advantages of running a mid-sized company as an LLC, there are just as many disadvantages to watch out for. Different states can have different rules and regulations for LLC’s which can complicate the overall operation of the company. A mid-size company is capable of functioning across multiple states, and if these states have differing rules and regulations regarding LLCs, then that means more time and money spent on maintaining compliance.
An ‘Inc’ corporation has unlimited possible owners, run by managers and can hire other employees. Ownership is based upon how much stock each shareholder owns and there is limited risk for them. An ‘LLC’ or Limited Liability Company has similarities because it also has unlimited owners, run by managers, they can hire other employees and there is limited risk for the shareholders. Some differences is that for ‘LLC’ there is the availability of silent partners and ownership is based upon how much each shareholder put down initially. In the instance that the company was mid-sized with 50 people and $10 million in revenue, the company would exist as a corporation. As a corporation there is a greater chance of earning that revenue due to a higher chance of gaining credit/loans and there is the option of sharing stock to potential investors. With a mid-size company with the amount of revenue, it would make more sense to be a corporation.
I also agree that a mid-sized medical device company making $10 million should exist as a corporation. With that amount of money invested into the company, they can raise even more depending on the dividends, which would attract business owners. They may not require loans but they would be easily paid off and can divvy up the responsibilities amongst others in the form of officers. They are also able to be taxed once which is a benefit for the shareholders. When compared to LLC, partners/managers can invest but they are not obliged to share in their profits. What's probably the biggest disadvantage is the double taxation that occurs.
As previously described by others, this mid-size company with 50 employees and $10 million in revenue will grow better as an S-Corp. It will provide the opportunity to reach out to shareholders and expand the business with limited liability and minimal taxation. In terms of being a C-corp, it won't be a good idea for this particular company due to the double taxation. I would like to add that being a U.S.-based medical device company it would be great to exist as an S-Corp. The reason is, the mid-size company will get a large number of potential shareholders from the U.S. due to the demand of the sector. However, if the business focus to expand drastically then C-Corp could be an option for reaching out to the world market. But being an LLC at this moment won't be a good choice due to the higher risk and liabilities involved in the medical device sector.
As previously described by others, this mid-size company with 50 employees and $10 million in revenue will grow better as an S-Corp. It will provide the opportunity to reach out to shareholders and expand the business with limited liability and minimal taxation. In terms of being a C-corp, it won't be a good idea for this particular company due to the double taxation. I would like to add that being a U.S.-based medical device company it would be great to exist as an S-Corp. The reason is, the mid-size company will get a large number of potential shareholders from the U.S. due to the demand of the sector. However, if the business focus to expand drastically then C-Corp could be an option for reaching out to the world market. But being an LLC at this moment won't be a good choice due to the higher risk and liabilities involved in the medical device sector.
I would say that a company like the one described in the prompt would qualify as a Corporation rather than an LLC. A med device company would tend to want longevity and stability, which a corporation can provide. In addition, the large revenue stream of the company would benefit from the structures of a corporation. That large revenue stream can be funneled through tax loopholes and other corporate shenanigans in order to reap the largest ROI possible for the shareholders. Looping back to stability, a corporation would allow for a continuous addition of investors who will increase the value of the company. Growth and stability are key for med device companies, as they must service a great number of people now and in the future. A corporation model would serve this business the best.
An LLC or a limited liability corporation is a structured business entity that helps shield owners, who are usually founders/members, from litigation. An Inc. or corporation, such as an S-Corp and C-Corp, is a tax classification that provides liability protection and passes income through to owners, who are usually shareholders. An LLC should consider becoming a corporation when the self-employment tax exceeds the tax burden if the business were a corporation. In this scenario the LLC should file as an S-Corp given the corporation has fewer than 100 shareholders and its revenue margin is large enough that the active shareholders could pay themselves reasonably and as a business they would end up paying less taxes given an LLC is taxed as sole proprietorship. As a C-Corp, they would be paying double the taxes, first for the revenue and then each shareholder would also be taxed - the main advantage over S-Corp being the ability to go public and that shareholders in a C-Corp receive a lower personal income tax rate.
Many of the above responses focus on growing the company and attracting investors, so they choose an INC. Personally, a mid-size company making moderate revenue would be safer operating as an LLC. An LLC provides strong legal protection by separating personal assets from business liabilities, while offering simpler and more flexible management structures. LLCs also offer the benefit of pass-through taxation, avoiding the double taxation that corporations may face, which can be especially advantageous for companies with moderate revenues like $10 million. Additionally, the fewer formalities and regulatory requirements make it easier for smaller, private companies to manage day-to-day operations without the governance complexities of a corporation.
