LLC Vs Corporation – Financial Treat . Choosing the right business entity (more specifically, an LLC vs. corporation) is an important step in doing business as it ensures that you have the right structure for your business size and needs. Whichever you choose, both can provide your startup with many advantages, such as liability protection, a formal operating structure, and additional credibility.
LLCs and corporations (sometimes called Inc. – short for Incorporated) are different classifications that offer their own advantages and disadvantages. So which one is best for your needs? Let’s take a look at the basics to help you decide.
Both types of companies require you to file company registration documents with the state government. Both protect business owners from liability for personal business obligations. Generally speaking, corporations have more standardized and stricter operating structures and more reporting and record-keeping requirements than LLCs. LLC owners have more flexibility in running their business.
From a tax standpoint, LLCs have more options than corporations. LLCs are not subject to any particular tax and can be taxed as sole proprietorships, partnerships, C corporations, or S corporations.
Shares in a company are easier to transfer than ownership shares in an LLC. This makes the company attractive to business owners looking for outside investors.
Let’s take a closer look at these differences.
The owners of an LLC are called “members”. Each member has a certain percentage or “membership interest” in the company. Individuals, corporations, other LLCs, and foreign individuals can have LLC membership benefits.
Ownership of an LLC is specified in the company’s operating agreement. Other details include what percentage each member owns, how the company operates and how the company treats new or departing members. Without an operating agreement, the LLC will operate under state law. In some states, LLCs must be dissolved when members resign, and the remaining owners form a new LLC if they so choose.
A corporation differs from an LLC in that the owners of the corporation are called “shareholders” and their ownership percentage reflects the number of shares they own in the corporation. It is relatively easy for a company to authorize additional shares or shareholders to transfer their shares to others.
An LLC can be managed by its members (owners) or by one or more managers, with members acting more like passive investors. Individuals running LLCs—whether members or managers—are not required to adhere to traditional roles or titles, such as CEO or vice president, but can create a management structure that suits their business needs.
In contrast, companies have a more rigid management structure, with a board of directors overseeing operations and senior executives directing day-to-day operations. Shareholders must meet at least once a year. Paperwork and records for shareholder and board meetings are extremely important to a company.
There are two ways in which corporations can be taxed. By default, the company is C company. You file a corporate tax return and pay corporate tax. When shareholders receive distributions from corporations, they report those distributions (along with any corporate compensation they receive) on their personal tax returns, and pay personal income tax accordingly.
Some corporations can avoid this double taxation of distributions by choosing to be taxed as an S Corp. S Corps do not pay corporate income tax. Instead, the company’s profits flow into the personal returns of shareholders, each of whom pays personal taxes on their shares. To order for an S corp. For tax purposes, the company must have 100 shareholders or fewer and meet additional ownership requirements.
On the other hand, LLCs do not have their own IRS tax classification. A one-person LLC is automatically taxed as a sole proprietorship, and a multi-person LLC is automatically taxed as a partnership. In both cases, corporate profits go to members, who pay income tax and self-employment tax on their share. But LLCs can also choose to be taxed as a C corporation. or – if eligible – S corp.
Taxes are a complex subject that may or may not influence your choice to become an LLC or a corporation. Always seek advice from an experienced accountant on the best tax classifications and strategies for your business.
Corporations and LLCs are both limited liability companies. This means that the owner is not personally responsible for the company’s business debts or lawsuits. However, business owners are still liable for their own negligence and any obligations that have signed a personal guarantee.
To maintain this liability protection, both corporations and LLCs should always keep business and personal finances separate. Owners should sign documents and contracts on behalf of the company, not in their own capacity. Other documents must also be kept for the company. This includes company meeting minutes, details of the annual general meeting and board information.
LLCs and corporations must also file the necessary documents and reports to maintain good standing within the state. Both types of companies are required to maintain a registered agent and update agent information with the state government when necessary. Most states require LLCs and corporations to file annual reports or franchise tax reports to remain active. The annual report form will ask you to ensure you have the latest information about your company and you will be required to pay an application fee. Some states require it to be done every two years.
Certain types of businesses may require additional documentation, such as B. Nonprofits that must go through a review process and submit an annual performance report.
Business owners looking to expand their business by hiring employees and bringing in outside investors are best suited for the company. Company shares are easier to transfer than LLC member shares, and sophisticated investors tend to prefer the company’s established and predictable structure. Entrepreneurs looking to start a business that will deliver on their promise to have a positive impact on society or the environment should consider starting a benefit corporation or B-Corp, if one exists in your state.
The cost of your LLC will depend on many factors, such as your state, the services you subscribe to, and additional things like operating agreements. For a more detailed overview of the fees you must pay, see our LLC Fees Guide.
The answer depends on the nature of your business, revenue, goals and the ownership structure of the business. There is no one-size-fits-all answer, and it’s best to speak with an experienced small business accountant before making a final decision.
LLC is short for Limited Liability Company. Inc. is an acronym for Incorporated, which means a company is a company. The owners of a company are called “shareholders” while the owners of an LLC are called “members”. The company has a clear management, ownership and tax structure, making it ideal for attracting external investment. LLCs are highly flexible, making them a popular choice for small business owners.