LLC vs. Corporation: Which is Right for You? Choosing the entity form is one of the first choices you’ll make while beginning a new enterprise. In general, most entrepreneurs create an LLC or corporation.
Regardless of which organization form you chose, both provide major benefits to your business. By incorporating your business, you can build professionalism and credibility. It also gives you limited liability. Here’s what you need to know when choosing between an LLC and a corporation.
What is an LLC?
LLC is short for a limited liability company. This is a hybrid organization structure that blends the flexibility, simplicity, and tax benefits of a partnership together with the liability coverage of a corporation. This corporate structure safeguards the owners’ personal properties (known as “members”). When the company runs into legal issues or is sued by a creditor, the complainant could only move after the company’s properties, not the limited company members’ personal assets.
Take a look at these pros and cons to help you determine if an LLC is the best organizational form for your business.
Pros of an LLC
Owners are not individually responsible for the company’s conduct. This ensures that the members’ personal belongings — such as their houses, vehicles, bank accounts, and savings — are shielded from creditors trying to recover from the company.
A limited company can be controlled by its owners. This encourages all owners to engage in the daily decision-making, or by administrators, who can be owners or outsiders. This is valuable if owners lack the experience and wish to recruit people who do.
Unless specifically stated, a limited company is a pass-through corporation, which ensures that its earnings are paid directly to its shareholders rather than being taxed at the business level by the government. They are instead taxed on owners’ income tax returns. This makes tax filing faster than when the firm is taxed at the business level. If the company loses revenue, you and other owners will shoulder the burden on the taxes and reduce your tax burden.
Easy To Start
The initial documentation and costs for an LLC are comparatively modest, but states charge a wide variety of fees and taxes. Furthermore, the registration procedure is easy enough for owners to manage without specialized knowledge, but it is smart to seek advice from an attorney or an accountant.
Cons of LLC
Limited Liability Has Limitations
A judge can rule in court that your LLC layout does not cover your personal properties. The practice is known as breaking the corporate veil, and you could be subject to it if, for instance, you fail to distinguish the company and personal transactions adequately or if you have been found to have managed the business fraudulently.
Consequence of Owner Turnover
In most states, if a member leaves the business, declares bankruptcy, or passes, the LLC will be dissolved. The surviving members are liable for all remaining financial and legal obligations. Of course, these owners will continue to do business; they will just have to form a new LLC from the ground up.
Unless owners decide to be treated as a corporation, the IRS deems LLCs the same way as partnerships for taxation reasons. If the LLC is taxed as a partnership, owners who work for the company are considered self-employed by the government. This means that those owners are individually accountable for paying Medicare and Social Security taxes, which are referred to as self-employment taxes that are measured based on the company’s gross net profits.
What is a Corporation?
This is a business organization form that the state recognizes as a legal body distinct from its shareholders. People and other entities may own a corporation, and control is readily transferable by purchasing and selling shares.
Here are the pros and cons of starting a corporation.
Pros of a Corporation
Personal Liability Protection
This business structure protects its members’ personal assets from liability. For instance, if a company is sued, the owners are not directly liable for business debts or legal liabilities – even if the corporation lacks sufficient funds to settle the debts.
Certain corporations (C corporations) face double taxation, while others (S corporations) gain tax advantages based on how their revenue is allocated. S corporations, for instance, have the advantage of dividing their profits between the company and the owners, allowing them to be taxed at varying rates.
Company Security and Perpetuity
Corporation control is centered on the portion of share capital, which has far greater stability than most entity forms in regards to transferring ownership and long-term perpetuity of the business.
Cons of a Corporation
Rigid Protocols, Formalities, and Structure
You must adhere to heavy regulations and many formalities to keep your corporation status. For instance, you have to retain a board of directors, keep board meetings, follow the by-laws, have yearly meetings, and produce annual reports. Certain forms of corporations are also limited (for instance, S corporations can only have a maximum of 100 shareholders, who must be American citizens.
Corporations are costly to establish and maintain. While existing corporations can easily raise money by selling shares, starting and sustaining a corporation can be expensive. To have a corporation up and running, you would most likely need a considerable amount of startup money, in addition to covering the registration costs, continuing fees, and higher taxes.
Long Application Procedure
Long Application Procedure
While completing the articles of incorporation with the secretary of state can be fast, the overall procedure of incorporating can be time-consuming. To better assess and record the particulars of the organization and its ownership, you would most definitely need to go through detailed documentation.