Business structure changing... but to what?

[JeremyV]

For the past year my company has been operating as a sole proprietership. This has been working out just fine, as I own the company, and anyone I have work for me is just sent a 1099, and I pay self-employment taxes, etc.

Well, I am currently under negotiations with another hosting company for a merger. Long story short, we're bringing in the other clients, servers, etc to my company, and after some sort of compensation is paid, the owner of the other company will become 50% owner of my company.

Now, obviously the legal structure of the business has to be altered. I don't want to do a regular partnership, so I'm looking at either an LLC or a Corporation. Now, before everyone wants to go off on tangents as to the general tax consequences of LLC vs. Corp, save your typing. I currently am the president of a C Corporation, and co-owner of an LLC. I know all of the little technical differences.

But with this instance, it's a bit tricky because the other owner coming in is in a different state. I've read when dealing with business operations in multiple states, a corp is better than an LLC. But that's something I'm not familiar with because my other companies are all strictly local for the time being.

So what do you think would be better for a situation like this? The company is already profitable, and the addition of more clients and servers will make it even more profitable. So things like passthrough taxation for reducing personal income tax is moot point. I'm looking at it as more of a legal issue with an owner located in a different state, and the acquisition of both clients and assets.

Any suggestions or discussion would be appreciated, thanks!

[Chicken]

I don't follow why it exactly matters that he's in a different state, since this will be the case if you choose a C Corp. or an LLC? You said, "I've read when dealing with business operations in multiple states, a corp is better than an LLC." -but are business operations going to happen in multiple states? Seems like you just need to decide where the new business is to be located and that's that. You could register the business in Delaware (a different state than either of you), and it wouldn't change things (far as I can tell, unless I'm missing something).

[JeremyV]

Well, from what I've read, an LLC doesn't work outside of the registered state. Meaning if I start a restruant, and later want to run my chain in multiple states, that isn't allowed without creating an LLC in each state, whereas a corporation you can be just one entity, then do business anywhere in the country.

So in this instance, yes, the primary business will continue to be run from my state, but with a partner located in a different state, technically business operations are now being conducted in another state. It all gets shady since things are done in an "online" world, but since someone is technically working from another state, legally this may not hold up in the event of a lawsuit or other legal matter from the information I've seen.

But this is why I'm asking, since I'm not 100%. I even talked to my accountant today, and they pretty much said "I don't know, it hasn't been tested in court". Which is exactly what I've read everywhere else. It may work just fine, but at the same time, LLCs are fairly new, and internet businesses are fairly new, and there is a lot of uncharted water out there :confused:

I know that a lot of hosting companies are LLC, but I'm asuming most of these are run by one or a few people, all located in the same state. That's why I was just wondering if anyone may have had experience with a similar situation, since nobody I've talked to can really one way or another with this situation.

[Andrew]

Hi Jeremy,

Although Im not overly familiar with the laws in the US regarding LLC and incorporation - it sounds like your best bet may indeed be a corporation approach. Typically a corporation would involve the issueing of shares - the issue of where the actual shareholders make their residence becomes moot.

[JeremyV]

That's what I'm leaning towards. I already run one corporation, so I'm familiar with what needs to be done, but I also know the added work that comes with it so I was hoping an LLC was possible. But considering there is no black and white answer, I may be best in this situation to just inc. and play it safe.