Incorporating an LLC: Everything You Need to Know
Deciding on incorporating an LLC is an important part of setting up your business. Incorporation separates the business from its owners and incorporators.3 min read
Deciding on incorporating an LLC is an important part of setting up your business. Business entities are not one size fits all; you need to decide which business entity works best for your business's strategy and long-term goals.
Some business owners choose to incorporate for the purpose of gaining more legitimacy, while others choose different options for tax reasons. Choosing the business type that works best for your company is necessary to start your business on the right foot.
An Overview of Incorporation
If you choose to incorporate your business, you are converting your business from a sole proprietorship into its own business entity. Incorporation in effect separates the business from its owners and incorporators.
When choosing the original structure of your business, it often falls into one of two categories: limited liability company or corporation. When deciding on which structure works best for your business, you need to assess the advantages and disadvantages of each structure.
Advantages of Incorporation
Some advantages of incorporating your business include:
- The ability to attract potential investors, as the company is able to offer shares of the company stock.
- The income splitting that occurs at the corporate level may create an overall lower tax liability.
Disadvantages of Incorporation
While incorporating has its advantages, the disadvantages a business owner should consider are:
- A c corporation is subject to double taxation, which occurs once at the corporate level, then a second time at the shareholder level.
- A corporation must hold annual meetings and record the minutes of those meetings.
- If electing to structure as an s corporation, you are restricted to only 100 shareholders.
Advantages of Choosing an LLC
LLCs are a good business designation for many reasons, such as the following:
- Limited liability: LLCs provide business owners with limited liability for business debts by safeguarding owners' personal assets. Owners are only at risk for using the money they have invested in the company.
- A flexible management structure: A corporation requires a set management structure in which it has directors to oversee major business decisions and officers that take care of the business's day-to-day functions.
- Pass-through taxation: LLCs can avoid the double taxation that corporations encounter by being taxed at the corporate and shareholder level. In an LLC, taxes pass through the business to the owner's personal tax returns.
- Ownership flexibility: An LLC has no limit on the number of owners.
- Less filing requirements: LLCs are not required to hold annual meetings and do not have minute book requirements.
- Fewer compliance requirements: LLCs require less annual filing requirements as well as minimal formalities to continue to do business. Such requirements include those mandated by the state as well as internal corporate meetings.
- Better credibility: Forming your company as an LLC provides you with more credibility with your customers than sole proprietorships have because your company has a formal structure.
- Flexibility with the management structure: LLCs are able to structure its management however its owners see fit. LLCs can choose to be managed by its members or managed by managers.
- Fewer restrictions: LLCs do not have the restrictions on owners that s corporations require.
Disadvantages of an LLC
While there are many advantages to forming your business as an LLC, there are some disadvantages that should be considered before deciding. Some of the disadvantages of an LLC are:
- You do not have the benefits of income splitting to reduce your tax liability, which is available at the corporate level.
- An LLC cannot issue stock, so it may have difficulty attracting investors.
- The formation of your LLC requires filing fees as well as ongoing costs. Fees must be paid when filing your Articles of Organization, and many other states require continued fees, such as annual report fees and franchise taxes.
- Transferring ownership interest is more difficult in an LLC than it is in a corporation because corporations allow the free transfer of stock. LLCs typically require a set approval process to change ownership or alter the percentage of any owner.
- Since an LLC is a fairly new kind of business structure, there are fewer legal proceedings and case law to help guide issues with LLCs,
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