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Ask The Experts: Choosing a Business Type

Q:  I am in the process of setting up an LLC. I live in New York City and my business partner lives in Virginia. Our business is media content—essentially developing, packaging and selling television, web and book content to publishers and studios. We are not selling retail goods, but rather offering intellectual property to companies that need content and we will take a percentage of the deals, be it a percentage of the advance and/or the royalties. Is this the most advantageous approach?

A:  Filing as an LLC versus a corporation is not simple to answer without additional information. My first comment is that with very few exceptions, I would not operate any business as a bare sole proprietor or general partnership. 

I would want to set up either an LLC or a corporation. Which of these entities might be best for you comes down to a tax question and some number crunching.
The most common reason business owners want a legal structure is to protect themselves in case the business has financial or legal problems. But, a legal structure by itself may not protect from personal liability. Misconception #1 is that a legal structure builds a separate protective entity from the principals, unlike a partnership. The problem with this misconception is that you cannot circumvent liability for your personal actions.

To explain this a little more, consider a landscaping business that has three employees. If an employee injures or causes damages to a customer it’s almost assured the business will get sued. If the employee who was responsible happens to also be an owner of the business (even if it is an LLC or a corporation) it is likely that the individual will be named in the suit and be liable for their actions. However, if the damages were caused by a non-owner employee or contractor, the business might have liability, but the owners would not likely have personal liability for damages.

A reason to consider a corporation is to take advantage of tax benefits afforded a corporation. I only mention the corporation here because an LLC is not a tax entity. While in most situations businesses can decrease their taxes by incorporating, the question is, “will the tax dollars saved be greater than the costs of a corporation?” It’s important to consider the ongoing expenses for a corporation such as higher accounting fees, state income or franchise taxes, legal expenses, and administrative demands. These ongoing costs could wipe out any tax savings from incorporating.

When considering the best option for a legal and tax structure, there is no way anyone can say the “s” or the regular “c” corporation or an LLC is the best option without having an intimate understanding of the business finances. In simple terms, anyone suggesting you choose a legal structure without knowing your finances, either doesn’t know what they’re talking about or has been gazing into a crystal ball. In either case, taking their advice is a mistake!

As a general rule—and I do emphasize general—if the taxable profits in a business is over $25,000 there is the possibility that a corporation might have some tax-saving advantages. Under $25,000 and the LLC would likely be a better option. However, I want to emphasize again, nobody can make a credible suggestion without doing the number crunching first.

Gene Fairbrother, Business Strategy Expert

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