With the ever-changing laws and regulations in the United States, entrepreneurs are finding it more and more difficult to navigate the legal landscape. In order to ensure proper legal protection and tax optimization, it is essential that business owners understand the differences between operating an LLC and a corporation. For entrepreneurs in Chicago looking for counsel that understands local regulations, there are five critical considerations to be aware of when deciding between an LLC and a corporation for their business.

An LLC, or “limited liability company”, is a form of business entity that allows the owner to separate their personal and business finances. With an LLC, the business is considered a “pass-through” entity, meaning that all profits and losses are flowed directly onto the company owner’s tax return. This allows for greater tax optimization opportunities and protects the business owner from being personally liable for any of the company’s losses.

Corporations, on the other hand, are separate entities from the owners. This allows for a greater degree of asset protection, since the business’s assets are shielded from the owners’ personal assets. Additionally, corporations offer various types of incentive plans, distributions, and voting rights that are not available to LLCs.

When choosing between an LLC or corporation, there are five key considerations to keep in mind. These include taxation, legal protection and control, company documents, banking and financial services, and legal resources.

Taxation

The primary distinction between LLCs and corporations is how income and losses are taxed. For LLCs, the entity itself does not pay any taxes on income earned. All profits and losses are “passed through” directly onto the owner’s personal tax return. This means that the owner is solely responsible for taxes on LLC earnings, and not the business itself.

C-corporations, on the other hand, pay taxes on their income as an entity. That means that they are subject to corporate tax rates, which are generally much higher than personal tax rates. Furthermore, C-corporations are subject to “double taxation” since the profits must be both paid as corporate taxes, then again when the money is distributed to the owners as dividends.

When it comes to taxation, LLCs generally provide more flexibility and more tax optimization opportunities than corporations do.

Legal Protection & Control

The primary benefit of incorporating a business is the legal protection it offers the owners. Since corporations are separate legal entities from their owners and shareholders, any liability incurred by the corporation cannot be extended to its owners. This means that, unlike with an LLC, any lawsuit brought against the corporation will not leave the owners liable for any of the corporation’s losses.

The level of control an owner has over the business is another important consideration when choosing between LLCs and corporations. Since LLCs allow for less formal rules, owners of LLCs generally have more freedom and control over how the business is operated. Corporations, however, require a board of directors and have more formal procedures for decision-making and certain corporate transactions.

Company Documents

LLCs and corporations do have some similarities when it comes to the documents needed to form them. Both LLCs and corporations require a formal document known as articles of incorporation. This document is filed with the proper state or federal agency and serves as the official documentation for the business.

LLCs, however, require a significantly simpler filing process than corporations do. This is because LLCs are “pass-through” entities and maintain their limited liability protection without the need to submit additional documentation to the state or federal government. Additionally, LLCs are not required to hold annual board meetings, issue stock certificates, or maintain corporate records as corporations are.

Banking & Financial Services

When forming an LLC or corporation, obtaining a separate bank account is key to maintaining the business’s legal protections. Banks may require a different set of documents for LLCs and corporations, so it’s important to choose the entity that best fits the business’s needs.

Incorporating a business also opens up access to new financial services, such as borrowing capital from banks and investors. Generally, most creditors view corporations more favorably than they do LLCs. This is because creditors can be sure that any assets of the corporation can only be seized, and not the owner’s personal assets.

Legal Resources

Finally, it’s important for entrepreneurs to have a reliable source of legal support, especially when they are just getting started. With the complex laws and regulations for LLCs and corporations, it’s important that new business owners seek out professionals with experience in this area.

UpCounsel is a trusted source of legal advice and counsel for business owners. Whether you’re setting up an LLC or a corporation, UpCounsel’s network of experienced lawyers can provide advice and support every step of the way. With access to high-quality attorneys, profiles of attorneys including client ratings and reviews, and a cost-effective way to outsource legal services, UpCounsel is an invaluable resource for entrepreneurs getting started in the corporate world.

When choosing between an LLC and corporation for a business, there are numerous factors to consider. Taxation, legal protection, company documents, banking, and legal resources are just some of the many areas to take into account in order to ensure the optimal legal protection and tax optimization for the business. By taking the time to research and understand the main differences between LLCs and corporations, entrepreneurs can make an informed decision that best suits their business’s needs.

Topics:

LLC vs Corporation,

Legal Services,

Tax Optimization