LLC vs Corporation: What’s the Right Structure for Your Business?
It might seem difficult to choose between LLC and corporation structure for some businesses, but in most cases the right answer is easy and clear. There are key differences between LLC and corporation that you need need to understand before you decide on the right structure for your business.
Both LLC and corporation entities will separate your personal assets from the business and protect you from liabilities. Once you have decided that a corporate structure is right for you, there are a few choices: LLC, C-Corp and S-Corp.
Intro to LLC – Why do I need an LLC?
LLC stands for Limited Liability Company, and that essentially describes its function. An LLC limits the liability of its partners or members against debts or lawsuits. An LLC requires a separation of business and personal finances. This is critical when it comes to protecting your personal equity and separate it from your business . If your business is ever sued or incurs debt, your personal property such as your car, home and personal bank accounts are protected being taken.
For tax purposes it can act as a sole proprietor, partnership or corporation depending on how many members are involved and how it is set up from the start.
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Domestic LLC Vs Foreign LLC
It is allowed in all 50 states and can be filed as foreign or domestic. A Domestic LLC is when it is filed in your “home state” or the state where you reside and do business. A Foreign LLC is when you form an LLC in a state other than your “home state”. There are some careful considerations as to where to file your LLC.
In most cases, you’d want to start a domestic LLC. But there are some advantages and disadvantages to filing as a foreign LLC. Please see this related article: difference between a domestic LLC and a foreign LLC
Intro to corporation: C-Corp Vs S-Corp
A C-Corporation is great for businesses that sell products, have a storefront or have employees. If you ever want to go public in the future, this is the entity you should choose to have unlimited shareholders. Tax implications are key in choosing this entity. Businesses must pay a corporate income tax, and dividends are distributed at the individual level. Owners pay personal income tax on profits and healthcare premiums for your employees can be written off.
S-Corporations are generally designed for smaller business entities. It works very similar to an LLC in protecting your personal assets, but you are able to pay yourself a salary from the company. Owners pay personal income tax on the profits and business income and loss is passed to the owners on tax returns. There can be no more than 100 shareholders, so the entity will stay on the smaller side and have different management structure than a C-Corporation. Shareholders must also be US citizens or resident aliens.
LLC Vs. Corporation: What’s the right formation for your business?
If an LLC doesn’t seem right for your business, a corporation might. There are two types: C-Corporation (C-Corp) and an S-Corporation (S-Corp). We’ll discuss each of these in a minute, but first let’s outline the characteristics of corporations in general. Forming a corporation shields your personal assets from business liabilities as there is a complete separation between the two finances. It is allowable in all 50 states. There are international corporations as well with their own set of rules.
Corporations are owned by a group on individuals who work together to generate a profit. Each owner controls a percentage of the corporation based on the number of shares they own. If you intend on growing and adding outside investors, you need to form a corporation. There is great deal of paperwork required to incorporate, but the advantages as far as taxes, protection and growth may be worth it.
There are several types of corporate entities, but there are two that focus on profit. C-Corp or an S-Corp are the most common choices when setting up your business. It is important to do your homework, and consult with an attorney or tax consultant in order to choose the best one for you.
If you decided that a corporation is the right structure for your business, see out top corporation formation services. All services on our top list support both S-Corp and C-Corp.
We’ve mentioned some of the reasons to incorporate already, but let’s recap. All of the entities above shield you from levels of personal liability to a varying degree. LLC offers different levels of protection depending on whether you form as a partnership or corporation. Corporations offer a very high level of protection.
Corporations offer a perpetual existence and transfer of ownership. Many businesses are passed down to family members. If one of the owners dies, the corporation lives on.
Corporations have a certain level of prestige and credibility. Your customers might trust you more with an Inc or LLC after your name. Banks might more easily lend money according to your business structure as well. In addition, corporations have a clearer management structure and larger companies are obligated to report actions to a Board of Directors or shareholders which holds them more accountable for their decisions.
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Deciding on your business structure is not a light decision. The purpose of your business, where you see it in the future and how many people you envision in the management structure, and where you do business are key considerations. For most businesses, starting and LLC or corporation in your home state is the right way to go. Even the best partnerships could use the protection of a management structure. Consulting a tax attorney or a business consultant is a great idea. Filing all the necessary paperwork will ensure you complying with all federal, state and local regulations.