While registering a business, the decision is generally made whether it should be a corporation or a limited liability company. This decision depends on the type of the business, the tax consequences of the entity, and other similar considerations. Upon such registrations, the assets of the business will be protected from creditors. It also offers an additional layer of legal protection for the business. But what should you choose between incorporation or LLC? Let us discuss this here.
Difference Between LLCs and Incorporations
While choosing the legal entity of the business, all owners of small businesses choose either between an LLC or an Incorporation. When you choose to incorporate a business, you start either by being the sole owner of the company or resort to a general partnership, where there are no owners. The business will be formally recognized by its state of incorporation and it becomes a legal business entity of its own.
When you form an LLC, you are forming a company with its legal existence that is well separated from its founders and members. In both forms, it is the LLC or the corporation that owns the business and you own the LLC or corporation.
LLC or Incorporation? What is your call?
LLC: Forming an LLC is a simpler process than forming a corporation and takes less paperwork. LLC falls under the jurisdiction of the state law and the process of forming an LLC depends on the state. The state will require filing the LLC papers online or with the secretary of the state. Some states require public notice before forming an LLC.
LLCs are flexible as the IRS doesn’t view them as separate entities for tax purposes. The taxation of the LLC is similar to a sole proprietorship and you have to pay the taxes on the profits of the LLC and the LLC need not pay any corporate tax, thus avoiding double taxations. The LLC also protects its members from all sorts of liability. If the company meets any obligations, the LLC will be the target for the creditors and not the properties of its members.
Corporations: The legal structure of a corporation has its advantages as well. There are generally two types of corporations, S corporation, and C corporation. In the S corporation, the owners will be taxed on the profits of the corporation. Whereas the C corporation is taxed at the corporate level, well separated from its owners.
Corporations have greater flexibility with their profits and the income generally passes through its shareholders, who will be reporting individual tax returns. The S corporations need not pay a higher corporate tax and the shareholders can also get tax-free dividends if they meet certain criteria.
Creating a corporation is a hectic task. There is a lot of paperwork involved, series of guidelines are to be met. It involves electing a board of directors, having annual meetings, adopting bylaws, and creating financial statements formally. Such record-keeping burdens are not required for forming an LLC. But it is solely in the hands of the individual as to which business structure he should choose to run it profitably.