Choosing Your North Carolina Business Entity: LLC or Corporation?

Then starting a new business in North Carolina, one of the most common questions people have is what form of business entity to use.  In this post I will compare corporations to LLCs (under North Carolina law only).  To put it mildly, when it comes to dealing with liability issues, there is little question that the LLC is the best choice.

A lot of clients initially prefer corporations.  This may be because they are more traditional, or more familiar.  But for most businesses, it makes much more sense to set up as an LLC.  For one, the LLC has stronger liability protection.  As has been discussed previously on this blog in older posts, North Carolina has a well developed "piercing the veil" doctrine -- a rule which allows courts to "look past" a corporation in order to find its shareholders liable in lawsuits.

In contrast, there is no such doctrine in North Carolina for LLCs.  For most practical purposes, this fact alone makes the LLC the clear-cut choice for most businesses.  But there's another aspect to LLCs that bears mentioning, where LLCs offer an even greater benefit:  if you end up having a judgment against you, individually, North Carolina law allows the other party to seize the shares of stock you hold in a North Carolina corporation, and liquidate them to satisfy the debt.  Whereas the law does not allow a judgment creditor to do the same with a person's membership interest in an LLC.  The most the creditor can do there is obtain a "charging order" to have the LLC pay over any distribution you might be owed - but not any salary.  Obviously then, if you own an LLC, and a court enters a judgment against you, you'll simply consult your accountant to figure out the best way to minimize "distributions" in such situations, in order to remain insulated from the effects of the judgment.  In theory, you could have any number of judgments against you and continue to receive salary from that LLC indefinitely, with creditors virtually powerless to reach that money, owing to the extraordinarily debtor-friendly nature of North Carolina law.  Accordingly, if someone recommends that you form a corporation or a partnership instead of an LLC, you should not hesitate to ask some pointed questions as to exactly why they would recommend such a choice.  The answer had better be quite compelling, because from a liability standpoint, forming any other type of entity besides an LLC is simply giving away a great deal of protection, often for little or no benefit. 

Comments

[Rich Steinhoff]

Isn't another advantage of LLC over corporation is that LLC can be represented by manager in court where a corp must be represented by an attorney....doesn't this save $$ in, for example, landlord tenant eviction actions?

[Tom Kerner]

That's a good question, and it does come up a lot, particularly regarding Small Claims court. In Small Claims court in North Carolina, an owner or employee of any kind of company can appear on the company's behalf. It does not have to be an LLC. Credit unions typically send account managers to handle a batch of small loan defaults, for example. However, outside of Small Claims court, in District, Superior, or Federal Court, a person seeking to represent a separate legal entity such as an LLC, will be engaged in the "unauthorized practice of law", a misdemeanor, as well as grounds for being barred from presenting a case. Since summary ejectments are typically heard in Small Claims court, it does not matter whether your property management company (or the company owning the property at issue) is an LLC, corporation, or any other form of entity.