Every business owner has times where they second-guess their own decisions. But you shouldn't beat yourself up about this; in many cases, the right answer is difficult to anticipate or otherwise unclear — some things aren't black and white. In the emerging field of cryptocurrency or other blockchain businesses, perhaps this rings even truer.
As you build a foundation for your company, you will be faced with many critical choices, one of which is certainly your business structure. You should definitely build your company as a formal legal entity, but whether that's a Limited Liability Company (LLC) or something else is entirely up to you.
The essential part isn't necessarily which entity you choose — it's that you choose one. Running your business as a legal entity prevents you from being personally liable and usually presents certain tax benefits. With each type of entity, you’ll find there are pros and cons to consider. So let’s investigate whether you should turn to an LLC or a corporation for your cryptocurrency business.
Forming an LLC for Your Blockchain Business
If you’ve been looking into your options, you've probably recognized that LLCs are the most ubiquitous business entities around these days. But why should your cryptocurrency or blockchain business make the leap when a sole proprietorship could suffice? While an LLC shares a similar tax treatment with a sole proprietorship, the key distinguishing factor of an LLC is the clear delineation it provides between your business interests and your personal ones.
While cryptocurrency is all the rage these days, this is very much a sector that is still coming into its own, and you'd be wise to protect your assets. By forming a legal entity for your company, your personal assets are insulated from any legal action you might find yourself caught up in. Moreover, you still retain the freedom to add shareholders if you want to — listed as owners of the company along with you — and you have sole control of day-to-day operations.
In essence, an LLC gives you the most protection for the least amount of effort up front, paving the way for you to take a larger step in your business structure when the time is right. For now, you might want to retain the flexible profit distribution, ownership and management status that an LLC enjoys. Considering that cryptocurrency options are popping up everywhere these days, the fact that your crypto or blockchain business has "LLC "in its name offers a sense of professionalism and legitimacy. The more you can do to put your potential customers and business partners at ease, the brighter your future will be.
Should You Form a Corporation for Your Cryptocurrency Business?
Of course, an LLC is only one route you can take with your cryptocurrency or blockchain company — you could go with a corporate business structure as well. Corporations actually come in multiple forms; we’ll discuss S Corporations and C Corporations here.
Like LLCs, S Corporations serve as pass-through entities that let profits flow straight to the owners. Double taxation does not apply here — owners are still taxed for the profit on their personal return only. Accordingly, shareholders need to vote on all major corporate decisions, and the power of the owners is limited as a result of the designation of directors. The owners’ assets remained protected, but now they no longer have the ability to make critical decisions independently.
Meanwhile, C Corporations do face taxation on both fronts. Perhaps that is part of the reason why C Corporations are less common than either S Corporations or LLCs. Still, many large companies — including cryptocurrency businesses like yours — leverage C Corporation status, choosing to raise capital through both common and preferred stocks (S Corporations can only issue one class of stocks).
C Corporations provide their owners with liability protection as well, but are a far more costly to operate with more complex taxes. If you're in the early years of your cryptocurrency or blockchain business, you should think twice before leaping directly into C Corporation status.
Ultimately, which type of business entity works for you and your cryptocurrency business is a personal decision based on weighing both your current tax status and your long-term vision for the future. Corporations, for instance, are perfect for raising venture capital, and you need to consider whether moves like this are on your radar. If you see yourself becoming an active cryptocurrency trader in the years ahead, a structure with simplified reporting of your business activity could make it easier to manage your growing company. But if you have huge plans for expansion, you might outgrow the straightforward structure of an LLC before long.
Anticipation is key when it comes to incorporating your cryptocurrency or blockchain business. Of course, you'll also require a hefty dose of patience to deal with the reporting requirements of a C Corporation over the simplicity of an LLC. In the end, there are compelling benefits to each entity. If you can't decide, note that it’s much easier to make a change from a simpler form (like an LLC) to a more complex one (such as a corporation) than vice versa.
Whatever direction you decide on for your cryptocurrency business, we hope the above information has helped crystallize your decision-making process. Incorporation can be useful, but don’t let this be the end of your long-term strategy for your cryptocurrency company. As it grows, you may wish to adjust its structure accordingly — we've shed a bit of light on why you may wish to transition from an LLC to a corporation when that time comes. Along the way, you’ll find countless ways to improve your operations, including how to make the most impact with your newly registered business entity.
If you need a little guidance along the way, Incfile can help prepare you for the current business landscape and provide the tools you need to succeed. Our extensive resources will empower you to take your business to new heights and progress confidently toward your company’s future. We offer virtual mailbox services, business tax assistance and more to help kickstart your business growth strategy. To learn more, check out our website and get started today!
Robert Yaniz Jr.
Robert Yaniz Jr. has been a professional writer since 2004, including print and online publications. Much of his experience centers on the business world, including work for a major regional business newspaper and a global law firm