The Differences Between Setting Up a Corporation vs LLC

the differences between setting up a corporation vs llc

When comparing a corporation vs LLC and each one’s set-up, you’ll find that you’ll go through more formalities when establishing a corporation. Therefore, your choice of an entity will depend on your plans for capital funding or if you wish to go public.

Some business owners don’t mind double taxation if they’re using their investors’ money to increase business capital. Therefore, business capital may be recorded as stockholders’ equity on a balance sheet. 

On the other hand, LLC owners often are business people who want to simplify how they set up and manage things. 

Business owners can do this more easily if they establish an LLC. While they cannot issue public shares of stock, they can have an unlimited number of members and enjoy the benefit of pass-through taxation. 

Therefore, they record what they pay in taxes on their personal income tax form. Both a corporation and LLC are safeguarded from personal liability.

the differences between setting up a corporation vs llc

The Basic Steps for Incorporation

Below are the basic steps you should follow for registering and forming a traditional for-profit corporation. By understanding the steps involved, you can create a checklist so you can keep on track of each part of the process.

1. Select a Unique Business Name

Before you file all of your paperwork, you need to select a unique name for your business. Usually, it’s best to have 3 names in mind in case someone already has the name you want. Check the Secretary of State’s website for your state and review the names already taken.

Giving your business a one-of-a-kind name is necessary, as it prevents confusion about who is operating your business and ensures any business matters–including trademarks and websites–are distinct, separate, and recognized.

When choosing a name, you might also consider a DBA (doing business as) name. This will permit you to register your business as, say, Ryan Inc., but allow you to use the DBA name for marketing and selling your products. 

Therefore, you might set up your business as Ryan Corporation d/b/a Ryan’s Home Furnishings.

2. Provide the Name of a Registered Agent

Some states call a registered agent a statutory agent. In either case, a registered agent represents a person or a business, located in your state, that receives your business  mail on your behalf before or after you’re incorporated. 

While you can name yourself as a registered agent, business experts advise that you choose a person or business. Doing so ensures that you’ll remain compliant and that you’ll receive the required paperwork on time.

3. Appoint the Corporate Directors

When you appoint corporate directors, you can choose to either meet and elect them or name them in your articles of incorporation. The named directors will serve until you hold your first shareholders’ meeting to elect their successors. The successors serve until the next scheduled meeting of shareholders.

4. File the Articles of Incorporation

Next, you’ll need to file the articles of incorporation. The articles, which are required for incorporation, should be filed with the Secretary of State.

According to the Legal Information Institute at Cornell Law School, the Articles represent a corporation’s charter – the main governing document for this business entity. The Articles include the number and types of shares issued for the business and outline the rules for electing the board of directors.

5. Write the Corporate Bylaws

Your corporate bylaws will make everything clear about your business operations. Drafting this document will help prevent internal disputes. Unlike the articles of incorporation, which is a public document that must be filed with the Secretary of State, corporate bylaws stay inside your company and serve as its fundamental rules.

6. Draft a Shareholder’s agreement

You’ll need to draft a shareholder’s agreement before you can issue stock. Investopedia describes a shareholder’s agreement as a document that shareholders sign that outlines their rights with respect to owning stocks and receiving dividends.

7. Hold Your First Board of Directors Meeting

You’ll need to follow the rules of incorporation by holding a board of director’s meeting. This meeting will take place annually.  During your first meeting, you’ll elect your board of directors who will hold their positions until the next meeting, held annually. Usually, directors maintain their positions unless the company decides changes should be made.

8. Issue Shares of Stocks

Issuing stock shares reduces a company’s debt and allows shareholders to own part of the business. If a company’s debt load is higher, it can reduce some of the expense by issuing common stock. Also, issuing shares increases a company’s liquidity and cash flow. When shares are issued, corporations can attract increased interest from funders of venture capital.

9. Obtain the Proper Permits and Licenses

You will also need to obtain the proper permits and licenses to run your company and remain compliant. For example, if you operate a retail business, some of the licenses may include a sales tax license, a DBA registration, a sign permit, a county or city business license, a resale license, or fire department permit.

10. Obtain an Employer Identification Number from the IRS

To file your taxes as a corporation, you need to obtain an employer identification number of EIN. This number is like a social security number for business owners. It is used as a unique identification number to identify you for tax purposes. You also need the number to pay employees and to open a business bank account.

11. Open a Business Bank Account

Once you receive your EIN, you can open your business bank account

Setting Up a Limited Liability Company (LLC)

Setting up a corporation versus LLC is a little more complex. However, you will find the steps for setting up an LLC are not all that different. You will just go through fewer formalities.

If you wish to establish an LLC, you need to do the following:

1. Decide the State Where you Want to Form Your LLC.

Choose your home state for your LLC formation if you want to have a major business presence where you are located. Otherwise, you might want to look into a lower-cost state like Wyoming, Delaware, or Nevada. Wyoming is a popular choice for forming an LLC nowadays since the filing fees are inexpensive and businesses can maintain their anonymity.

2. Give your LLC a Distinctive Name 

Go to the SOS database and see if your name choice has been taken. When you apply for an LLC, you should list about three different names for your company, just in case the name you think is available has already been taken. You can reserve a name for your LLC for up to a year. You can also extend the time, if needed.

3. Select a Registered Representative

Choose a registered representative to receive your company’s legal and tax papers. The registered representative must be available Monday through Friday during regular business hours and have a street address in the state you locate your LLC.

4. Fie Articles of Organization with the Secretary of State’s Office

The articles of  organization are similar to the articles of incorporation that a corporation files

5. Create an Operating Agreement 

This agreement can be compared to the bylaws for a corporation. While you don’t need to file it with the state, you should have one created to avoid internal conflicts.

6. Obtain an Employer Identification Number

Obtain an EIN for tax purposes and to open up a business bank account.

7. Open Up a Business Bank Account

Having a separate bank account for your business separates your personal holdings from your business assets, which keeps everything more organized. You should have separate accounts, especially if you’re subject to an audit or you wish to protect yourself financially.

Corporation vs LLC: Go Online and Establish Your Business

If you’re trying to decide on the advantages of establishing a corporation vs LLC, the above information can help you make a more informed decision. Once you decide, you can take the steps needed for formation by contacting the Corporation Center at 800-580-4870 for more information.