Filing your business as a legal entity with the state is a huge step for new small business owners. Both Corporation and LLC owners have the opportunity for limited liability protection, saving on taxes, and letting their customers know that they’re giving their business to a legitimate, professional entity of the state. But there are a few key differences between the two. Choosing an entity is ultimately up to the business owner to decide which formation will complement their business’s needs best.
Forming a limited liability company (LLC) provides benefits for lots of different types of business. Some of the most popular are: real estate, consulting firms, and partnerships. LLCs have a reputation of being the “simple” entity. The startup is easy, and the management structure itself is pretty simple. There’s not a lot of paperwork and hassle that goes into starting and running an LLC. Additionally, they’re pretty inexpensive to start compared to some of the other options available to small business owners.
Running an LLC
Other benefits include: protecting your personal assets through liability protection (as with the Corporation), having the ability to deduct certain expenses, reducing your audit risk, and establishing credibility with customers. Maybe one of the biggest draws of the LLC is the pass through taxation. LLCs are independent legal entities but not independent tax entities (i.e. income tax for LLCs are reported and paid on the owners’ personal income tax returns). So they are taxed only at one level, where corporations experience double taxation, once at the company level and again at the owner.
Forming a Corporation
Forming a corporation is more extensive than forming an LLC. Not only will you be filling out more paperwork, but you have to pay special attention to the language of the paperwork. For example, if your corporation will be engaging in what your state might call “professional services,” the Articles of Incorporation must bear special language and the corporation must be formed pursuant to certain statutory provisions. “Professional services,” according to most states, usually consist of: medical services, legal services and representation, accounting and financial services, architectural services, among others- depending on your state of incorporation.
It is important to note that most states vary in their requirements regarding licensing of professional activities. So it’s always a good idea to seek the advice of an attorney if you fall within the “professional services” statute of your state.
Running a Corporation
Like an LLC, forming a corporation draws a line between the owner’s personal and business assets, helping protect your personal assets from risks or debts associated with running a business. This means that if the business can’t pay a creditor or gets sued, the creditor cannot legally come after the member’s personal assets such as their house or car.
The management of a corporation is a little different than the management of an LLC, too. The owners of the corporation are called shareholders. The directors are responsible for long-term management and make the major decisions regarding the corporation. The officers are responsible for day to day operational activities of the corporation and usually consist of the president, secretary, and treasurer.
Corporations also have stock options. You may choose to incorporate your business to raise capital and offer stock options to employees. Additionally, when you incorporate a business, you can have unlimited shareholders.