Advantages of an LLC Over a Corporation: Everything You Need to Kno
The advantages of an LLC over a corporation are factors an owner must consider when deciding which business/legal structure is right for their company. 3 min read updated on February 01, 2023
What are Advantages of an LLC Over a Corporation?
The advantages of an LLC over a corporation are factors an owner must consider when deciding which business/legal structure is right for their company. There are benefits whichever way you choose to incorporate that affect personal liability and credibility.
Factors to Consider When Forming a Limited Liability Company (LLC)
- Limited liability companies (LLCs) are new to the type of businesses an individual can form.
- Much like a corporation, an LLC offers benefits that surpass those of a sole proprietorship or partnership.
- Once you incorporate, your business becomes a legal entity that is separate from its founders. It most often becomes either an LLC or a corporation.
- Members (owners) of an LLC are protected from personal liability with issues associated with the LLC.
- The limited liability of an LLC protects your personal assets should your company be the subject of a lawsuit.
- Depending on the state where your LLC is formed, members are protected from creditors collecting the distribution of profits. With a corporation, creditors are not allowed to collect personal assets from a shareholder, but they can collect their dividends.
- Owners of an LLC may choose to have the business taxed as a corporation.
- Choosing the right business type, whether an LLC or corporation, consider what your goals are for the short and long-term.
- Consult with an attorney experienced in the formation of corporations and LLCs.
- Consult a tax specialist, such as a CPA, who understands and can advise you on the advantages and disadvantages associated with an LLC and corporation tax structure.
Considerations When Choosing an LLC or a Corporation
- A business is not incorporated as an LLC. LLCs are not a corporation.
- LLCs and corporations are required to register with the state.
- At tax time, an S corporation and an LLC are considered "pass-through" tax entities. C corporations are taxed as a separate entity. If profits are distributed as dividends to owners (shareholders), a C corporation is subject to double taxation.
- With an S corporation, there is an opportunity to save on Social Security, Medicare, and self-employment taxes by allowing an offset of non-business income with business losses. A C corporation does not have this set-up since it is treated as a separate tax entity.
- Should a corporation choose to sell stock, this may be an easier option than owners with an LLC attempting to sell membership interests.
- There are several reasons C corporations are preferred by new businesses. One is the ability of owners to hold preferred and common stock, which have differing dividend levels. Another reason is the prospect of higher dividends attracting investors such as venture capitalists interested in funding a business.
- Taxes are a consideration, and LLCs have some advantages, such as allocating profits and losses among its members, which is not allowed with an S corporation.
- Also, when an LLC borrows money it can lower the owner's taxes, but this is not the case with an S corporation.
- When property is contributed to an LLC to set up the business, it is not taxable. The regulations for corporations do allow for a tax-free situation but only for contributors in control of the business.
- C corporations have the option of accumulating earnings year-to-year if the accumulation falls within a reasonable limit.
- When an LLC is formed, its owners may be other corporations, foreign persons, or trusts. An S corporation does not have this option. There are no restrictions on LLCs or C corporations on who can be an owner or how many owners are involved.
- S corporations have other restrictions, such as non-resident aliens cannot be an owner and the corporation cannot exceed 100 owners.
- An S corporation cannot be owned by other S corporations, non-qualified trusts, C corporations, or LLCs.
- The business structure of LLCs is less formal than that of corporations. The structure is flexible allowing the owner's a hands-on management approach to business or they can opt for daily operations handled by others.
- In a corporation structure, management is overseen by directors with day-to-day operations handled by officers.
- Corporations offer more in their fringe benefit plans than any other business structures.
- Benefit plans available only to corporations include employee stock purchase plans, stock options, and retirement plans.
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