Incorporate or LLC: Everything You Need to Know
Going the incorporate or LLC route can be a tough decision, but you must know that an LLC is an easier process when compared to creating a corporation. 3 min read
Incorporate or LLC
Going the incorporate or LLC route can be a tough decision, but you must know that an LLC is an easier process when compared to creating a corporation. With that, you must first establish the goals of your business to know for certain which entity is best for you. LLC is the abbreviation for “Limited Liability Company,” and “Inc.” or “Corp.” pertains to a corporate entity. It is easy for business owners to get confused on which business structures is the best path, but the process can be easier by keeping in mind two important things: management system and tax structure.
To incorporate or create an LLC is to move beyond a sole proprietorship to an entity that’s more formal and rigid in structure. In essence, an incorporation allows the business to become an entity of its own, which is entirely separate from the owners who created the organization. The new structure comes in two labels: LLC or Inc.
Both entities are formed by filing the necessary paperwork in your respective state. Further, both business types add personal liability protection if the business faces legal battle or encounters financial difficulty.
LLCs safeguard owners, also known as members, from personal liability as the LLC does business. For instance, creditors cannot touch your personal belongings in the event of a judgment against you.
LLCs and the Benefits
- Flexible Management Structure: Corporations have a more structured management system where directors oversee daily operations and officers manage the everyday affairs of the business. LLCs allow members to tailor their management system accordingly.
- Pass-through Taxation:Pass-through taxes allow taxes to pass from the LLC to a member’s personal tax returns. In other words, each member only pays personal taxes, and the LLC itself is not taxed.
Further, LLCs do not fall under a particular tax classification. Instead, all single-owned LLCs pay taxes as if it’s a sole proprietorship, and multi-member LLCs are taxed as partnerships. With that, LLCs can also be taxed under an S corporation, but only if it qualifies.
Under a corporation, shareholders meet on an annual basis and receive any corporate profits based on the shares they purchased. Adding new shareholders under a corporation is an easy process, including the transfer of shares between shareholders.
For large corporations, shareholders are usually not involved in daily business operations, and all responsibilities and duties of each member are included in the entity’s bylaws. The primary members of a corporation include:
In addition, corporations must conduct annual shareholder meetings, and most states mandate that members record minutes of their meetings, including records of any vital management decisions. Such a requirement also pertains to corporate entities with one or two owners. LLCs do not have such a requirement, but you should keep records to ensure that your business is running at peak efficiency.
Differences Between S and C
When assessing a corporate structure, business owners consider tax structure to be the primary difference between C and S corporations. Essentially, an S corp. offers pass-through taxation as opposed to C status, which faces double taxation. With that, C-corporations are only taxed if corporate profits are divided among shareholders in dividend form. C-corps pay taxes on any profits at the business level and as owners when they file personal taxes. Owners must pay personal taxes on the dividends they receive as income.
Certain corporations can choose the S structure, where they are not taxed at the corporate level, but at the personal level. However, only certain corporations can choose the S system. The following corporation types cannot choose S classification:
- Corporations with over 100 shareholders
- Corporations with multiple ties of stock classifications
- Foreign corporations
However, certain businesses choose C classification in order to gain access to preferred and common stock. An investor interested in higher dividend yields may be attracted to a C-corp., especially if the business generates a sound profit.
Advantages of an S Corp.
The corporations that can take advantage of S classifications come with a number of benefits. First, owners can deduct any losses, especially during the start-up phase on their personal tax returns. S corps can also deduct in the area of self-employment taxes, and it allows business to off-set non-business income with any business losses.
Knowing whether to choose the incorporate or LLC route can be tricky, which is why you should post your job to our UpCounsel marketplace. UpCounsel retains some of the top lawyers in the county to help you decide whether a corporation or LLC structure is best for you. Further, we will guide you through the filing process, including any state laws you need to be aware of.