Choosing the right business structure is important whether you are just starting a business or are a seasoned executive. For businesses based out of California and the greater Los Angeles area in particular, the choice of between an LLC (limited liability corporation) or a Corporation takes on added significance as both fall under the remit of the California Corporations Code.

Laws and regulations around LLC vs Corporation structures vary depending on the state, so it’s important to seek out counsel that is experienced with local regulations. UpCounsel's network of experienced attorneys have the necessary backgrounds to help you make the best choice for your business.

The following Frequently Asked Questions (FAQs) provide an overview of what LLC and Corporation structures entail and guidance on how to go about selecting the right structure for your business venture:

What is a Corporation?

A corporation is a separate legal entity in its own right meaning if a shareholder were to face financial or legal difficulty, any losses incurred wouldn't fall onto the shareholder personally.

For the purposes of taxation, your corporate profits are taxed at corporate rates rather than individual rates. Furthermore, corporations often require more formalities to organize and operate them and there are more reporting requirements.

What is an LLC?

LLCs are a hybrid entity combining features from both corporations and partnerships. An LLC is a separate entity from its owners so that any debts, losses, liabilities, or lawsuits do not fall onto owners themselves. Using an LLC also allows you to choose how your business will be taxed such as taking advantage of S-corp tax benefits.

The structure also offers a certain level of flexibility for smaller businesses that a corporation doesn't and because LLC’s have less formal paperwork to organize and operate than a corporation, the structure is slightly easier to manage.

What is the Difference Between a Corporation and LLC?

The main difference between an LLC and Corporation is organizational structure. An LLC structure is pass-through meaning owners pay taxes on their individual tax return. A Corporation is a separate legal entity and profits are taxed at corporate rates.

When it comes to organization and operation, a Corporation has more formalities and more formal paperwork to complete. An LLC is less formal and requires less paperwork.

What Are the Benefits of an LLC?

The primary benefit of an LLC is that as an owner, you are not personally responsible for the company’s debt or liabilities. Most importantly, the structure provides you with the ability to choose how you want the business to be taxed such as taking advantage of S-corp tax benefits.

Moreover, the flexibility of LLCs makes it easier to set up and manage with formalities such as the need to hire officers, hold annual meetings, or having your finances audited.

What Are the Benefits of a Corporation?

One of the main benefits of forming a corporation is the increased protection of your personal assets. Unlike an LLC where owners are personally liable for debt, losses, and liabilities, a Corporation shields your personal assets from your business assets.

Moreover, stockholders of corporations have the ability to transfer their stock and can take benefit from tax deferral which allows them to keep their capital gains or deductions until they are realized.

How Do I Choose Between an LLC vs Corporation?

A fundamental question you should ask yourself is whether you want to protect your personal assets from your business assets.

If protecting your personal assets is a major concern, then forming a corporation is the better option for you. The formalities and paperwork associated with forming and operating a corporation can also be beneficial for certain businesses such as companies looking to go public.

However, if you are a small business just starting out, the flexibility of an LLC is well worth considering. As LLCs require less paperwork and formalities, they are more suitable for small businesses.

What is the Tax Treatment for an LLC vs Corporation?

The taxation of LLCs and corporations depends on the type of tax you file for. For instance, if you file taxes as an S-Corp, the income you make through your LLC or corporation will be taxed as income on your personal federal tax return.

However, if you file a C-Corp your corporate profits will be taxed at the corporate tax rate. You as a shareholder will also have to pay tax on any dividends paid to you from the business.

The essence

The decision between forming an LLC or Corporation has multiple facets and the right route to go down is unique from one business to the next. Comparing LLC vs Corporation is important for those in the greater Los Angeles or California area to ensure you are following local regulations.

Whether you're just beginning the process of setting up your business or are an experienced executive, UpCounsel's legal network of experienced attorneys can help you make the right choice for your business venture.




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