One of the most challenging decisions for a business owner to make is whether or not they should form an LLC or corporation. There are many pros and cons to both, making it difficult for some people to decide which one is right for them. In this article, we will discuss the advantages and disadvantages of each type of company structure to be better prepared when making your decision.
What is an LLC?
An LLC is a type of business structure that offers some of the benefits of corporations, but with less formality. – It also does not have as many formalities for taxation purposes. But more importantly, if you are starting your first company or own an existing one and do not plan on having outside investors ever, then it may be best suited for you.
Types of LLCs
PLLC
This is the most common type of LLC. It stands for “professional limited liability company,” and this designation says it all: professionals, such as doctors or lawyers, form PLLCs to protect themselves from malpractice suits or unpaid client claims against their assets.
Domestic LLC
A limited liability company (LLC) is a business structure that can combine the advantage of tax flexibility and pass-through taxation with limited legal and financial risks. An LLC operates as a corporation, but it does not have shareholders or stockholders; instead, members manage the entity’s affairs.
Member-Managed LLC
The most common type of LLC is run by the members and not a board or CEO. All decisions are voted on among the members. Members can be individuals or other businesses such as corporations or partnerships.
Single-Member LLC
A single-member LLC owns all the profits of the company. That means that there is no double taxation like with a corporation because only one person has ownership in the business (which makes it pass through to their taxes).
Multi-Member LLC
If your business is a multi-member LLC, you will be automatically taxed as a partnership. This means that the income and deductions from the company are passed through to each member of the company for federal tax purposes.
Foreign LLC
Foreign LLCs are foreign corporations that register with the Secretary of State in their state to do business.
LLC Advantages
- Taxation that is passed on to the next generation
- Owners are protected from personal guilt.
- Reduced paperwork means lower filing expenses.
- Operating framework that is less complicated
- There is no restriction on the number of owners
- It’s less difficult to start a business than it is to create a corporation.
- Members can have complete influence over how the organization is run and what choices are made.
- Simple to keep up with
- The ability to alter the tax structure
LLC Disadvantages
- Self-employment taxes apply to members.
- In some cases, automatic dissolution can be initiated
- Raising cash from outside investors may be tricky
- Excise duties
- Stock cannot be issued
- You can’t utilize business income splitting to lower your tax bill.
What is a Corporation?
A corporation is a legal business entity that can be used to protect the personal assets of its owners. Anyone who has invested in stocks and shares will have seen corporate logos like IBM or General Electric on their statement, as these businesses are both corporations. The word ‘corporation’ originates from the Latin corporate, which means to form or be shaped.
Types of corporations:
C Corporations
C corporation owners must report income and losses on personal tax returns. C corporations are responsible for their taxes, while S corporation shareholders receive pass-through taxation (i.e., they pay the individual rates corresponding with their respective incomes).
S Corporations
S Corporations are similar to LLCs in that they have a board of directors and offer limited liability, but the key difference is how S corps distribute profits. An S corporation doesn’t issue stock certificates as corporations do; instead, it has owners who report their share of income and losses on their tax returns.
Nonprofit Organization
A nonprofit organization is an entity that does not distribute its profits to shareholders or owners. Instead, it reinvests any earnings back into the organization for operations and programs.
Corporation Advantages
- Shareholders’ liability protection
- It will be easier to recruit investment.
- It’s a lot easier to reduce your tax burden.
- It is less difficult to transfer ownership.
- Can exist indefinitely
- Stock-selling ability
- A business structure that is well-established
Corporation Disadvantages
- Double taxation is a possibility
- There are just a few stockholders (for S corps)
- Regulations are more stringent, and there is less freedom
- Starting is more expensive and time-consuming
- There is a lot of paperwork
LLC vs. Corporation
1. Business Formation
States have different regulations for business formation. Some require a filing fee while some do not, and each state has a minimum number of members needed to form a company.
2. Ownership
LLCs are not required to have members. A single member can operate an LLC, but most businesses use multiple owners/members. Corporations require one or more shareholders – no exceptions.
3. Management Structure
LLCs and Corporations both offer different management options, but the main difference is that corporations provide more protection for managers. The LLC structure allows members to manage the company as they wish. This means that a limited liability company owner can be held personally liable for debts incurred by members if they mismanage or misuse funds.
4. Taxation
There are a few differences between the taxation of LLCs and corporations. In many states, any net income earned by an LLC is considered ordinary business income that has to be reported on Schedule C or another schedule related to regular businesses.
5. Liability Protection
LLCs, offer all members personal liability protection, making it a great choice if your business is at high risk. A corporation only protects the shareholders and employees with limited liability.
6. Formal Requirements and Compliance
LLCs may be able to save on filing fees and comply with other legal requirements. With a corporation, there must be an annual shareholders’ meeting at which officers are elected and minutes are taken, and a record of what was discussed must be kept.
We hope this article helps you make the right choice for your business among the LLC and corporations.
