If I were starting my own business, I would choose to establish a Limited Liability Company (LLC), as LLCs offer both limited liability protection and simplicity in management. The protection alone of personal assets during business is an enticing factor that places LLCs over sole proprietorship or general partnerships. However, with added tax flexibility, LLCs simply become more of an enticing choice. Unlike a corporation that can be doubly taxed, an LLC provides flow-through taxation, meaning profits/losses directly affect personal tax returns. Having the opportunity to only pay taxes once in such a model is especially critical in small/medium-sized businesses where every dollar counts and can be put to critical use.  

Moving onto management, LLCs do not come with the typical formalities or administrative burdens that traditional corporations come with. As a managing member, I can directly run the business and still hire non-managing members and managers as the company grows without having to concern myself with shareholder meetings or corporate officers, although they can be useful after a certain level of scaling.

However, as a business might expand and take on greater financial/legal risk, would it be better to stay an LLC or shift into a full corporation? What is the threshold at which this shift should be initiated?

I can definitely understand why an LLC would be an appealing choice when considering how to start a business, however, I lean more towards the sole proprietorship approach. The reason for this is because of the simplicity and independence it offers, especially if we're talking about a business that is just starting out.  I like the idea of having full control over decision-making and being able to set the direction of the business without having to consult a partner and I could focus on getting the business off the ground without having to worry about maintaining an LLC. Don’t get me wrong, I understand that there is a higher personal risk when taking this approach, but I believe that it can be managed with proper planning (like any successful project in industry). 

On another note, once the business is established to a point were doing it on my own is no longer a plausible option, I like your point about transitioning from LLC (or sole proprietorship) to corporation as the business grows. From my perspective, once any business (no matter how it starts) reaches a certain scale and begins taking on larger clients (I’m talking about projects that scale from hundreds of thousands to millions of dollars), it should make that transition into a corporation. While this transition offers more legal work and is stricter, I would consider it the best option since your business is now handling a lot more assets and money, which in turn increases the liability. In that sense, do you think starting simple and evolving the structure as the business grows might be a more flexible approach than beginning with an LLC right away?

Thanks for the scenario! I agree with Krish, I would do a Limited Liability Company (LLC) that would likely be taxed as an S-Corp instead of a sole proprietorship or general partnership. In Dr. Simon’s lecture, he talked about how a sole proprietorship would leave all my assets at risk due to unlimited personal liability. If I have one defective shipment, a dispute, or an injury caused by my product, then all of my things would be at risk. There are also continuity limits where my company will just die with me. These risks outweigh all the benefits in my opinion, deterring me from a sole proprietorship. 

For the general partnership, there are several liability issues, and my partner can make a mistake or sign a contract and completely put me on the hook. Additionally, it is hard to unwind from my partner if we do need to split, and one of our deaths can dissolve the entire business. There are many risks in this case as well. 

An LLC, however, has limited liability through the corporate veil. The business can take the hit, but not my personal assets, which is not something that the sole proprietorship or general partnership offers. Additionally, there are flexible ownership and roles with an LLC since I can have managing versus silent members with an LLC and add employees without changing the entire structure. There is tax efficiency with pass-through taxation as an S-corp election, which can reduce self-employment taxes. I would get an EIN and credibility with customers and vendors with an LLC, which is much stronger than a sole proprietorship or general partnership. Lastly, there is continuity, keeping my business alive for the long term. 

For example, if I am building a small business regarding test services or software tools, an LLC would allow me to protect personal assets if a client sues for losses from bad results. Additionally, I can bring in specialists into the company without giving them power. Growth would be clean, as I would start as a single-member LLC and then add cofounders as managing members. I can convert to a C-corp when it’s time. Even though all of this is more paperwork than a sole proprietorship with fees and compliance, this is a tradeoff that offers more benefit. I will also make sure I have insurance and proper contracts to cover my bases. 

In what cases do you think a sole proprietorship or general partnership would be most ideal? In what cases are they ideal for the entirety of the business lifespan? (i.e. in what cases would you not convert to an LLC or other type of business?) Additionally, if you were launching a business with one close partner, would you form a two-member LLC immediately or start as a single-member and add your partner after a certain period of time? Why?

I would prefer to create a Limited Liability Partnership or a Limited Liability Company because the liability protection is a lot better in these two in comparison to the sole proprietorship because as soon as there is an issue the person who started the company has to take the sole blame for the entire problem. Which depending on the issue could mean that it could end up costing the person a large amount of their assets, at least with the LLP or LLC the liability is shared and even if the other person makes a mistake, it is their job to repay and not yours alone. At least all three are only taxed once, which makes the profits a lot higher in comparison to the corporate option. I think depending on how big the company gets it would make sense to change from a LLC to eventually a corporation, but that would come with a lot more restrictions. Another downfall of the corporation is that there are more people in a place of power, which means that it is a need to ensure the cooperation of multiple people, which can make it harder to come to a conclusion. I think the best idea is to start out with a LLP or LLC and as the company grows to become a corporation to get more legal power and protection

When starting a medical device development business, forming a Limited Liability Company (LLC) can be a smart choice. An LLC combines the flexibility of a partnership with the legal protection of a corporation, shielding owners from personal liability for business debts or product-related claims. This structure allows multiple members to contribute expertise, funding, and resources while maintaining clear ownership and management agreements. Additionally, LLCs offer tax flexibility, allowing profits to pass directly to members without double taxation. Overall, an LLC provides a balanced structure that supports innovation and risk management in the medical device industry.

If I had to choose between a sole proprietorship and a partnership, I would choose a sole proprietorship. Partnerships can be risky because if one partner makes poor financial decisions or goes into debt, both parties are held liable. I would prefer to run the business on my own so I wouldn’t have to worry about disagreements with a partner, potential lawsuits caused by their actions, or the company dissolving if my partner were to pass away.

That being said, if I were starting a business, I would actually choose to form an S-corp. This structure allows owners to take a salary and potentially save on self-employment taxes. S-corps also don’t have to be large companies with a board of directors and officers. My current employer is an S-corp with only four employees. I personally have no desire to run a large company, but even for a small business, an S-corp has many advantages that a sole proprietorship doesn’t. For example, an S-corp has liability protection, tax benefits, and it can give the business a more professional image that is helpful when working with clients or lenders. I also prefer the corporate structure because it offers limited risk to personal finances, makes it easier to obtain loans, and allows the business to be passed on to my children in the future.

When it comes to starting either a sole proprietorship or a partnership, it depends on the circumstances and type of business. It also depends on the amount of taxes, liability, and responsibility you are willing to take on. 

Ideally, I’d strive for a sole proprietorship, as I would like to have total control over the business without needing the say of anyone else. Sounds selfish, but I believe in the adage: “If you want it done right, do it yourself.” This is especially true in the context of consulting or professional services, where you only have yourself and your experience to rely on to serve your clients. Furthermore, taxation and setup are straightforward, allowing you to start the business quickly and efficiently. 

However, if risk management is a more pressing concern, I would strive for a partnership, as you then split the liability between yourself and your partner. This would mean binding yourself and your partner to a contract that lasts until either of you resigns or passes away; “it lasts as long as you do,” in Dr. Simon’s words. Ideally, I’d seek out someone with a similar mindset that I’d be able to bounce off of and even gain additional insights I’d likely not get alone.

Alternatively, if I were starting a different kind of business (i.e., manufacturing, product design), I’d go for an LLC, S-Corp, or C-Corp. As I’ve discussed in another thread, while a sole proprietorship or partnership would serve well in a licensed professional/consulting context, a company that seeks to create or improve products (especially medical devices) is infeasible with the former; a sole proprietorship or partnership would not support necessary structured departments (engineering, QA/QC, Legal, Marketing, etc.). An LLC is simple to manage, has lower risk, and gives plenty of protection. Once your credibility is established, you can convert to an S-Corp to get your feet wet with wider investment and while keeping taxation uncomplicated. Finally, once the company is more established and experienced, a C-Corp conversion would be advisable to expand and gain international exposure.