A major facet of managing your own business is making important decisions. On a daily basis, you will likely be faced with choices that can have sizable impacts on how your business will continue to operate. If you are just getting your enterprise off the ground, this is especially true. You have probably found yourself facing questions ranging from who to hire, to what color you should paint your office walls. From a business structure standpoint, you may also be wondering: is it better to start a corporation or LLC?
In truth, there are a number of ways in which you can structure your business. Whether it is an LLC, corporation, sole proprietorship, or limited partnership, there are going to be advantages and drawbacks to every selection. In weighing the differences between a Limited Liability Company (LLC) and a Corporation, there are a number of factors that you are going to want to assess. Read on for a primer on the ins and out’s of each structural option.
What is a Limited Liability Company?
Many business owners opt to form limited liability companies for a number of reasons. For one, they are available to entrepreneurs in all 50 states. They also afford their members the concept of “limited liability.” That means that should a business face insurmountable debts or costly litigation, the members of the LLC will not personally be found liable. This means that you can protect your house, retirement accounts, and other personal assets from legal judgments.
LLCs are also treated as “pass-through” organizations by the Internal Revenue Service (IRS). In simple terms, this means that the profits generated by the business–which is its own entity–are not taxed. Revenues instead pass through to the members of the LLC who in turn pay taxes on their income.
LLCs generally provide more flexibility in management options than a corporation will. They are also less stringent when it comes to reporting requirements. Depending on the nature of your business and industry, forming an LLC can make a lot of sense.
The Advantages and Drawbacks of a Corporation
While the owners of an LLC are referred to as “members,” in a corporation, ownership is instead granted to shareholders. Corporations enjoy many of the same liability protections as limited liability companies, but there are some key structural differences. Corporations are much more rigid in how they must be managed, and when forming one you will need to appoint a board of directors.
The ease in which shares can be transferred allows corporations to generate investment more easily than an LLC. In an LLC, investment typically requires membership–and paperwork– while in a corporation, simply issuing stock can allow for fractional ownership stakes. Professional investors often find corporations more attractive, and for that reason, this pathway may be logical for your business’s needs.
Corporations can also find themselves taxed “twice” by the IRS, as opposed to the pass-through benefits of an LLC. You will want to consult with an experienced tax attorney prior to forming a corporation so that you have a clearer idea of how this will impact you.
Is It Better to Start a Corporation of LLC? Let Corporation Help You
If you have assessed your options and decided to form an LLC or a corporation, we can help. We offer easy-to-use web templates for establishing these organizations in all 50 states. To learn more, contact us today, or visit our helpful FAQs page.