LLC or Corporation? Which is Right for Your Business?

Many small businesses question whether they should start an LLC or a Corporation. The relative simplicity and flexibility of an LLC is typically better for businesses who want to avoid heavier fees early on with few tax obligations.

For smaller businesses, most people typically are actually wondering what the difference is between an S-Corporation because it is for smaller companies that do not want massive amounts of public stock.

Regardless, incorporating or forming an LLC have distinct advantages for you personally and for your business. At the end of the day, you can always change what type of business you have formed to something more advantageous to your personal situation. Just make sure to consult with an experienced attorney before doing so.

The following are the four main categories that differentiate between an LLC and a corporation:

Risks and Liabilities of your Business

Both an LLC and a corporation typically do not take any personal responsibility for the business’s debts and liabilities. Both types of businesses do not take liability because they are separate legal entities created by a state filing.

Formalities and Expenses

Both an LLC and a corporation have a lot of formalities and paperwork assigned to them. The only real differences here are that the forms to file in each state have different names.

For an LLC, you have an article of organization, and in a corporation, you have your articles of incorporation. More information and paperwork will be needed to incorporate as it is a much more intricate type of business, but the filing fees and formalities are almost identical.

Similarly, both are subject to state-mandated formalities, such as filing annual reports and paying the necessary fees.

Taxes

LLCs are what people like to call “pass-through” tax entities, which means that all the profits and losses pass through the business to the owners who report their share of the profits on their personal income tax returns.

However, an LLC can make itself taxed like a corporation in its operating agreement.

A corporation will not share these easier taxation laws, as a corporation is a separate taxable entity. You will need to file a corporate tax return, reporting the profits and losses of the business. These profits are taxed at a corporate level and any corporate income distributed to its shareholders will be taxed at the shareholders personal income tax rate. S-Corporations differ in that they do not pay taxes at the corporate level.

Investment

To raise capital, corporations have the ability to sell ownership shares in the company through stock offerings, while LLCs can only sell interest in their company. Businesses who are going to need venture-backed funding or need to pay employees in stock are going to need to form a corporation.

As you can see, there are some important differences between LLCs and corporations and it is crucial to distinguish the pros and cons of each before making a decision.

If you have more questions, UpCounsel can help by connecting you with a qualified startup attorney who can guide you in the right direction.