Individuals who are starting new companies or are maybe looking to expand their current business beyond a sole proprietorship should consider incorporating their businesses. Two of the most common incorporation choices are a corporation and a limited liability company, otherwise known as an LLC. This decision should not be made lightly, and it is a good idea to gain a solid understanding of each choice and the differences between each entity in order to make a well-informed choice.
LLCs and Their Benefits
An LLC is a limited liability company. It can be owned by one or more individuals, who are sometimes referred to as members. The members can either run the business themselves, or they may choose to have it managed by an outside company.There are several benefits to having an LLC, such as:
- An LLC protects members of the company from personal risk. Should a lawsuit be brought against the company, this form of business safeguards the members and their personal assets.
- There are few restrictions on who may become members of an LLC.
- There is not a formal management system structured into the formation of the business, so members can develop a management system that works best for their needs.
- This type of business allows “pass-through taxation,” or taxation at an individual level rather than a business level. Business income and losses can be reported in a personal income tax return.
- Unlike a sole proprietorship, an LLC has to be incorporated, which provides a heightened level of credibility.
Corporations and Their Benefits
A corporation is an entity that is owned by shareholders. These companies are managed by a board of directors as well as a group of officers who oversee the day-to-day operations of the business. Shareholders receive dividends from the business, however they cannot influence the operations of the company unless they are officers or directors. The two main types of corporations are S corporations and C corporations. The greatest difference between the two is in how taxes are handled, and each option has its perks.
- An S corporation is a corporation with 100 or fewer shareholders. It is taxed under Subchapter S, which is similar to the taxation of an LLC. Under the tax law, shareholders report dividends and income on their personal tax return.
- A C corporation is usually for larger companies that have more than 100 shareholders. This form of corporation is taxed as a business, which allows the business to benefit from various tax breaks. Along with paying business taxes, if a shareholder is paid dividends they must also pay taxes on their individual tax return, making them subject to “double taxation.”
As you can see, corporations and LLCs have a few commonalities and differences just by the nature of them being different business entities. There are a few other key differences you should consider.
- Ownership: LLCs and C corporations do not have restrictions on who can be an owner or the number of owners, whereas there can be no more than 100 owners, and there are several stipulations that govern who may own an S corporation.
- Dividends: C corporations allow shareholders to hold different stock interests, which allow them to create different levels of dividends. This is not an option with S corporations or LLCs.
- C corporations are able to retain and accumulate earnings from year to year. Since LLCs and S corporations report revenue as income, they are not able to do this.Creating a business is a major decision, so it is critical that you have all the facts and that you choose the option that makes the most sense. Considering the facts shared is sure to be of a big help in deciphering which business type would best suit you and your business.
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