Whether you’re starting your own business or restructuring the one you already have, deciding between an LLC or a corporation is an important consideration. Both options offer advantages and drawbacks, and the ultimate choice between them depends on the individual needs of your business.

The basic legal differences between LLCs and corporations are distinct, and it's important to evaluate them in the context of Los Angeles businesses in order to understand the impact on you.

This article provides some of the top five factors to consider when deciding whether to form an LLC or a corporation in Los Angeles. We'll also dive into the complexities of operating an LLC versus a standard corporate structure, and the possible benefits they might bring.

First, let’s discuss the major differences between LLCs and corporations. An LLC, or Limited Liability Company, is a legal design that shields individual owners from personal responsibility for organizational debts. The company is responsible for its own debts, although some members may be exposed if they signed a personal guarantee.

Unlike an LLC, a corporation is a separate legal entity from its owners. They have shareholders, and all profits or losses flow through the business, not directly to the individual owners. That means that the owners don't have to pay taxes on the business’s income and can benefit from some tax deductions.

One advantage of forming a corporation is that it protects owners from personal liability. LLCs provide some protection from liability, but corporations provide a greater degree because they have distinct legal identities, individual owners are not responsible for corporate activity.

Now, let’s review the best five considerations for forming an LLC or a corporation in Los Angeles specifically:

1. Taxation: As mentioned above, traditional corporations can take advantage of more favorable taxation than LLCs can. In addition, LLCs have a burden of filing Form 1065 to report income, wages, and other information to the IRS. Often, further expenses may be added due to needing to pay state taxes as well. These taxes could become more complicated if you might need to register your business in multiple states. It’s important to note that some states may impose the same taxes on both LLCs and corporations.

2. Management structure: LLCs are more flexible with regards to management, allowing for non-owners to manage the business and making it easier to assess profits or losses without the complexities of the corporate structure.

Corporations, on the other hand, require formal management structures and meetings of shareholders and directors.

3. Cost: LLCs tend to be more expensive to form in the beginning because of the need to file papers with the state and pay fees. The cost of forming a corporation tends to be lower, but maintenance requirements tend to be higher because of the need to keep detailed records and conduct regular director and shareholder meetings.

4. Liability: LLCs tend to offer less liability protection than corporations since individual members can be held personally accountable for the company’s debts. A corporation, on the other hand, provides a greater degree of separation between its owners and its liabilities, shielding individual owners from individual liability unless they signed a personal guarantee.

5. Scalability: The ability to scale the business is an important factor for both LLCs and corporations. LLCs can limit scalability if they are unable to capture additional capital from investors or borrow funds from the bank. A corporation provides more flexibility in terms of scalability and access to capital.

At the end of the day, whether you’re looking to form an LLC or a corporation in Los Angeles, it’s important to consider all of the above factors. The level of protection and the advantages and disadvantages to each structure are important to consider both now and in the long-term with regards to growth. Fortunately, finding the right fit doesn’t have to be a challenge: UpCounsel’s experienced network of attorneys makes it possible to get the advice you need to make informed decisions.




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