Pros and Cons of LLC vs Corporation: Everything You Need to Know
The pros and cons of LLC vs corporation are something that any business owner needs to consider when choosing a business structure. 4 min read
Pros and Cons of LLC vs Corporation
The pros and cons of LLC vs corporation are something that any business owner needs to consider when choosing a business structure. If you are looking to distinguish your business from others, you need to know about the pros and cons of these types of businesses so you can make an informed decision.
What is an LLC?
An LLC, or a limited liability company, is a combination of the components of a partnership and a corporation. It has become a very popular type of legal business structure. LLCs are available in just about every state. It is a way to combine the benefit of limited liability and pass-through taxation. This is quite similar to S corporations.
The legal structure of an LLC is much less restrictive. Many companies find the S corporation status too confining, outweighing the benefits. Owners of small businesses often take advantage of forming an LLC due to the ease of set-up and maintenance when compared to a corporation.
Since the option of an LLC is somewhat new in the U.S., all laws that govern this form of business are not interpreted by cases in court. Each state will have its own statutes with regard to LLCs and are continually keeping up with new laws. They continue to be refined and can sometimes be tricky.
If you are considering an LLC, you need to remain knowledgeable on the laws and taxes associated with this business model.
What is a Corporation?
An S corporation is a pass-through entity, just like an LLC. C corporations are taxed separately. C corporations are double-taxed when corporate profits are paid out in dividends. They will pay the tax on the profits of the business first, and then the owners have to pay personal taxes on their own tax returns. This results in double taxation.
LLC vs Corporation: Formation
LLCs are a combination of parts of a corporation when it comes to limited liability with a partnership, with regard to ease of flexibility and taxation. LLC owners are called members and are not held personally responsible for the debts and other obligations of a business.
The business is not taxed. All profit is passed through to the members of the LLC that is then paid on his or her own tax returns.
An LLC is perfect for a small business that wants to have liability protection. It is also ideal for those who do not wish to raise money using investors or those that want a flexible business model with regard to taxation and management.
Within the last decade, a number of small businesses have opted to form LLCs. It is easier to set up than corporations, but the fees required by the state are similar.
The following also must be completed during the LLC formation process:
· You have to file articles of organization in your state as well as publish the notice of the formation in your local newspaper.
· Although it is not required, you should have an LLC operating agreement. This lists the percent of interest of each member as well as information of the profits and losses of the business. It also outlines the members’ rights. The agreement also structures your finances and outlines the operation regulations.
· You will need to obtain any local permits required as well as register your trade name if you plan to operate under another name that is not the official name of your business.
· One-person businesses can form an LLC.
A C corporation is owned by the shareholders. The company is responsible for the liability of the business, not the shareholders. The business is taxed when it makes profit and then taxed a second time when the shareholders are paid dividends.
C corporations are good for start-ups that plan to eventually go public. A C corp is also best for businesses that want to raise capital with investors or in businesses where liability is high.
The following is needed to form a corporation in most states:
· File the articles of incorporation
· Create the bylaws and the resolutions that outline the operating rules for the company
· Name the board of directors
· Issue stock certificates to all initial shareholders. This can be complex since stock certificates have to comply with federal laws
· Name a registered agent that will receive the formal documents for the company
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