Corporation vs. LLC: What is Best for Your Business?
Did you know that having two founders instead of one raises your odds of business success? You may even raise 30% more money for startup? Decisions like this become critical when starting your own business.
Another decision that has to be made is determining what type of business entity you plan to form. You’ll have to decide between a corporation and an LLC, each which has its own benefits and drawbacks.
Not sure which one is right for your new business? Here’s a guide to help you.
Corporation Versus LLC
The best choice for you and your business is one that starts you off on the right foot. As you read through the differences, benefits, and drawbacks, think about your short and long term business goals.
To create an LLC or corporation, you’ll need to file paperwork with the state. Once you submit your paperwork and the required fee, the state will process your application, and when it’s finalized they’ll send you your new entity information.
Corporations are owned by shareholders who own stock shares. Stock shares are easy to transfer from one person to another. If you plan to source outside investors, then a corporation is a smart choice.
When there are multiple owners in an LLC, they’re called members. Members are given a membership interest which determines their percentage of the company. The way a member’s interest can be transferred is dictated by the operating agreement. If a member makes the decision to leave the LLC and the operating agreement doesn’t dictate what will happen to that member’s interest, the LLC must be dissolved.
You’ll have protection from personal liability with both an LLC and a corporation. This means that your personal assets are safe if the business entity was to get sued or faces debt collection.
Although your personal assets are safe, the money you’ve invested in the business is still at risk. That money will go towards the defense of the company and any debts that it owes.
When it comes to taxes, corporations and LLCs are taxed differently.
There are two ways that a corporation can be taxed. As a C corporation, the company pays its taxes based on its profits. In this case, shareholders must also pay on the payouts they receive, which results in double taxation and is a major drawback for corporations.
As an S corporation, the corporation doesn’t pay taxes based on income. All profits of the corporation flow to the shareholders, and the shareholders are required to pay taxes based on that income. This is called a pass-through method. Not all corporations are eligible to claim this status. If a corporation has more than 100 shareholders, more than one kind of stock, or any foreign shareholders, they aren’t considered an S corporation.
There is no tax status for an LLC. If an LLC has only one member, that person pays taxes as if they’re a sole proprietor. If there are multiple members, they pay as if they’re a partnership. LLCs have the freedom to choose between paying taxes as a C or as an S corporation.
LLC members have to report their income as self-employment tax, and the profits of the LLC flow through the entity and to those members.
When it comes to keeping records, corporations have many laws to comply with. They must have annual shareholder meetings and keep minutes of those meetings. They must also file annual reports and track all shareholder records. These requirements have to be complied with, even if there’s only one director.
While most states don’t require LLCs to hold annual meetings or file records, it’s still advisable that accurate records are kept.
Profit Sharing and Management
All corporations have the same standard structure: a board of directors, officers, and shareholders. Directors oversee the long-term potential of the business, officers run the business on a day-to-day basis, and shareholders own interest but are not actually involved in running the business. Shareholders do, however, collect a share of the profits based on their shares.
LLCs are a bit more unpredictable. There is no standard structure and the business is managed by the owners or group managers. You have the freedom to manage an LLC as formally or informally as you choose, and profits can be distributed in any manner that you wish.
Another element to consider is that states have different regulations for how LLCs form and how they operate. This can cause problems if you plan to operate a business in multiple jurisdictions.
Which Is Right for you?
Choosing a structure depends on investors and how much freedom you desire when making business decisions. As an LLC, you’ll have much more decision-making power.
Corporations may require more recordkeeping and reporting, but the advantage of this extra work is that you have the opportunity to reduce self-employment taxes.
Form Your Business Today
When deciding between a corporation and an LLC, consider your business’s short and long term goals. Compare and contrast the benefits and requirements for each entity. Once you make a choice, all you have to do is file your paperwork. When the state sends your registration information, you’re ready to get started building your business!
Get your incorporation startup guide now and start setting up your corporation or LLC.