If you’re considering opening a business, you might be wondering is it better to start a corporation or LLC. That’s a good question and the answer will help you decide which is better suited to the type of company you are starting. There are a variety of other factors to consider as you make the decision, including taxes, legal matters and business structure. Use this article to help you weigh the pros and cons of both types of entity so that you can choose the right one for you.
Forming an LLC
In terms of ease, forming an LLC is typically much simpler than forming a corporation. The LLC process requires less paperwork but is under the jurisdiction of the state in which it’s formed. Most of the time, this involves filing paperwork with the Secretary of State where you reside and/or where you plan to form the LLC. You’ll create an operating agreement that outlines the roles and responsibilities of each member of the LLC. There are also tax benefits to an LLC, including flexibility on how you’re taxed, as well as reporting profit and loss on personal income taxes.
Disadvantages of an LLC
Members of an LLC will have to pay self-employment tax, which is something to keep in mind. Additionally, if the LLC doesn’t meet its obligations, in some instances this can lead to the automatic dissolution of the company. That includes for tax reasons, such as not filing. There are also regulations for operating in more than one state, which can be difficult to navigate.
Forming a Corporation
While forming a corporation is a bit more work than an LLC, it’s a good choice for businesses that want to keep company taxes separate from personal taxes. However you can choose to form an S-Corp, which operates similarly to an LLC where the owners are taxed on profits and losses. A C-Corp is taxed via corporate income tax. Shareholders in a corporation have benefits like personal profit from excess income that doesn’t occur in an LLC.
Disadvantages of a Corporation
One of the biggest drawbacks of forming a corporation is the sheer amount of paperwork involved. You’ll also have to elect a board, create bylaws, host consistent meetings for partners and maintain financial documents. There’s also the issue of double tax, where the corporation pays taxes, but the shareholders also have to pay taxes on any profits. There’s a lot more effort involved in forming and running a corporation, which is something to keep in mind as you consider which option is best for you.
Considering: is it Better to Start a Corporation or LLC?
Both an LLC and a corporation have their own set of advantages and disadvantages. The best thing for you to do is to learn as much about each option as you can. That way you can make an informed decision that best suits the needs of your business. When you’re ready to decide is it better to start a corporation or LLC and get started on the paperwork, Corporation Center is here to help. Contact us today and we’ll help you get going.
