Enriching Life Through Innovative Ideas SM

CHOOSING BETWEEN AN LLC OR CORPORATION

llc-v-corp.jpg

Many business owners create separate legal entities for their businesses for taxation and liability purposes. Additionally, creating a separate legal entity for your business helps protect your individual assets from exposure to the company’s debts and obligations. In order to make an educated decision on how to structure your business, it is important to understand the differences between business entities such as a Limited Liability Company (LLC) and a corporation. 

LLCs and a corporations have different taxation calculations, structures, and reporting standards. This article will help business owners become familiar with the key differences between the two in order to help you decide whether an LLC or a corporation is best-suited for your business.

What is an LLC?

An LLC affords its owner limited liability and shields a business owner’s personal funds from his or her business obligations. An LLC’s structure can be fluid. Any member who split the LLC’s ownership interest can be listed as an owner of the LLC, based on ownership percentage. However, the transfer of ownership interest requires approval from all other owners of the business. As a result, attracting investments to an LLC may require a longer approval process.

When it comes to taxation and reporting, LLCs enjoy flexibility in how they are taxed and may benefit from pass-through taxation. Pass-through taxation happens when a business’ income is categorized as personal income and the business owner only has to pay taxes on the income once. This is an LLC’s distinct advantage as the owner of a corporation often has to pay taxes on the business income in addition to his or her own personal income.

What is a Corporation?

Corporations have a set of rigid structure and enjoy perpetual life, meaning that it is relatively easy for a corporation to exist long after the original owners have left or passed away. Corporations have more stringent requirements regarding formation, which include having a board of directors, holding board meetings, and adhering to extensive recordkeeping requirements. The owners of corporations are known as shareholders and it is relatively easy for shareholders to transfer their shares to others. As such, corporations make easier investment targets as investors are able to simply exchange capital for shares of ownership. It is also easier for investors to sell their ownership interest later on to someone else. For this reason, many venture capitalists and other investors will only invest in companies that are corporations.

When it comes to taxation, corporations are taxed as either S Corporations or C Corporations. Shareholders of S Corporations are eligible for pass-through taxation as corporate profits are passed onto shareholders’ personal tax returns. However, not all corporations qualify to be taxed as an S corporation. Corporations that have more than 100 shareholders might include shareholders who are corporations themselves, partnerships, or non-resident aliens subject to different taxation requirements. Additionally, certain shareholders might have different classes of stock that are not eligible to be taxed as an S Corporation and must be taxed as a C Corporation. C Corporations are required to pay a corporate income tax on their profits, and shareholders must pay income tax on the earnings they receive from the corporation.

Why choose an LLC?

Small businesses that are managed directly by their owners benefit the most from structuring their business as an LLC. An LLC offers the business owner tax benefits and limited liability protection without the rigid requirements of a corporate structure. Additionally, the relative difficulty of transferring ownership interests makes it difficult for a hostile takeover.

Why choose a Corporation?

Businesses that are looking for outside investors should establish a corporation due to the fluid transferability of shares. Corporations and their shareholders can benefit from pass-through taxation if they meet the requirements of an S Corporation. Business owners who are looking to go public in the future should also consider structuring their companies as corporations.

Making a Decision

Deciding what type of business entity is right for your company comes down to the balance between the tax benefits, ease of ownership transferability, and reporting and structure requirements. LLCs can offer tax benefits and greater flexibility; however, they are not attractive to most outside investors. S-corporations offer tax benefits and ease of ownership transferability, but place corporate requirements and restrictions on shareholders. Owners of C-corporations are subject to “double taxation” in addition to corporate requirements, but in exchange they offer the greatest flexibility for shareholders. Initially, the tax benefits of an LLC can lead many business owners to make the decision without much thought; however, this can be problematic for a business looking to expand and secure additional capital in the future. On the other hand, business owners may underestimate the hassle and cost of a formal corporate structure.

Speaking with an experienced attorney and an accountant is the first step in determining what business entity is right for your company. In order to fully understand the advantages and pitfalls of each entity type, be prepared to discuss not only the current details of your business, but also your vision for the company’s future.

FindLaw Network

What Our Clients Say

Starting a new business can be a bit scary. Aside from worries of failure, there’s also the hassle of making sure all legal paperwork are properly filed. I reached out to Mr. Wang (Tommy) because of his excellent reviews and reputation and I am so glad I did. He was thorough and meticulous in answering all of my concerns and took time to find out special laws and policies regarding the kind of business I am starting. I could focus on the daily practical side of starting my new office without worry because I felt Tommy was reliable and took my case seriously. My business is opened and it’s all been a smooth start because of Tommy’s help. I have plans to start another business venture in the next few years and I already know I’ll be coming back to Wang IP Law.

The Shindig W.

I came to Tommy for help reviewing a licensing agreement I had secured with a well-known manufacturer. Tommy made sure I understood all the details in the contract and he negotiated with the company to improve my side of the deal. I mentioned to Tommy at my first consultation that we were looking to expand throughout the US and were investing a lot of money to make a big entrance into the market. I did not think I would have my store open so soon but Tommy also has connections with the local area and realtors to help me secure the location for my first store in the Los Angeles area. Tommy works a lot with the local businesses and he understands how to transition from the Asian market to US market. Within 8 months my store was open for business and fully operating. I must recommend Tommy to any business owners looking for help with contracts and improving their side of the deal. Tommy has the knowledge and experience to make sure there is a smooth process to open for business here, and make sure that your company is set up for success.

LI H.

I think Tommy and his team by far considered the best people to work with in my 16 business years. Beside quick responses to all my inquiries, they also done things right and providing very professional solutions. I’m highly recommending Tommy and his firm to all business owners.

Calvin C.

I have been working on my Utility Patent for almost 4 years. I have hired and fired two very reputable IP firms because with all their expertise and reputation for being some of the top firms in IP Law, I felt a lack of connection and care in my product, time and financial investment. Then I found Tommy and his team. Tommy does not waste time. He and his team are professional and extremely thorough. After 4 years, I finally found a legal team that I felt spent the time to really understand the components of my utility patent. Tommy also very mindful of cost and how and where my money would be better spent. I really feel I am in great hands with Tommy and his team. They have been patient with my revisions. And most importantly, they made me feel that they fully understood the importance this patent is to me. It has been a great and comforting pleasure working with Tommy.

G.L.

Read All