When creating your business entity, one of the primary questions that you’ll have to ask yourself is whether you want to set your company up as an LLC or whether you wish to incorporate. The two structures have some similarities. The differences are what you should be focusing on as you decide which business type most suits your needs. In this article, we’ll look at a few of those differences and some of the benefits to each business structure.
What is an LLC?
What exactly is an LLC? LLC stands for limited liability company. The owners of an LLC are referred to as members. As with a corporation, the members are also afforded personal liability protection in an LLC. So, for example, if someone sues the company, the owner’s assets are not at risk. At the same time, those suing can effectively seize the owner’s holdings with a sole proprietorship to satisfy a judgment against the company. As far as paying taxes, you do not have to pay federal taxes directly; these can be produced when profits and losses from the business are reported on your returns.
What is a Corporation?
On the other hand, corporations will, in some instances (depending on whether it is a C or S Corp), have to pay federal taxes directly versus the owner(s) reporting business profits on their returns. Corporations also have a board of directors that, in essence, oversees the company’s management structure.
Benefits and Drawbacks of LLCs and INCs
Both business structures have their pros and cons. It is a matter of determining which entity best reflects your business model and aligns with the company’s goals.
Among the key benefits of an LLC:
• Greater flexibility. Whereas with a corporation, a board of directors has a hand in the firm’s management, there is more flexibility with an LLC. Generally, an LLC will be managed and run by the company owner(s). Rather than have a board oversee management, the members will make the decisions and operate things as they see fit.
• Fewer record-keeping requirements. Corporations are required to have an annual shareholder meeting. The minutes must be recorded and logged. And beyond this, there are other record-keeping practices required of a corporation. There are no such requirements with an LLC, and thus, record keeping in this capacity is minimal.
• Taxed like a sole proprietor. This is perhaps one of the main benefits of establishing an LLC over a corporation. You have to pay on company profits twice with some corporate tax structures. You are taxed much as a sole proprietorship by setting up an LLC. You will report the company’s profits and losses on your income taxes and pay any taxes owed in that way.
Benefits of a Corporation:
• An S Corp is a pass-through entity. This means that the owners are taxed only on the profits and losses as reflected on their returns. There is also a C Corp structure where the company is taxed at the corporate level, and then the owners are taxed on their returns as far as income earned. However, there is the advantage of being able to keep money in the corporation with a C Corp.
• Liability protection. With both a corporate structure and an LLC, the owners receive liability protection. So, if someone does sue the company, or if the company is in some way liable for damages, then the personal assets of the corporation’s owners are safeguarded.
• Corporations can have a perpetual life. As the ownership can continually pass on from one owner to the next or one generation to the next, there is no life limit on the company.
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