For an aspiring entrepreneur the path towards growth is to attract capital for business. Investors generally look for a few qualities in the business they want to invest. For any investor, the return on investment is the foremost criterion. The returns can be in the form of regular cash flow or appreciation in the value of investment. For attracting such investors, the best form of business is a corporation. The advantage of a corporation is that the shares are freely transferable. The investor can invest or divest in a corporation and there are very few formalities to be observed. Another advantage of a corporation is the personal liability protection it offers to the shareholder. Due to these advantages, investors are readily willing to invest in corporations and hence the ease in attracting capital for expansion.
The state laws govern the incorporation of your small business. The incorporation rules vary in each state. The key procedure for incorporating a business is to file a certificate of incorporation with the state and pay a filing fee. In some states the certificate of incorporation is also called the articles of incorporation. The ownership in a corporation is structured as units of stock or shares, which is subscribed to and promised to pay for by the shareholders. The corporations can be of two types namely an S Corp or a C Corp. The basic legal structures of both forms are similar. The main differences are the share holding and taxation. Shares in an S Corp are restricted to natural US citizens and limited to a maximum of 100. There are no such restrictions in a C Corp. C Corporations are subject to corporate taxation where as the S Corporation advantage is that the profits are passed through to the share holders and taxed as their personal income.
Limited Liability Companies also offer personal liability protection to its owners who are called members. The advantage in LLC Vs. Corporation is that in the eyes of the general public, corporations are ‘perpetual’. LLCs are considered to be bound to the life of its members. One advantage in LLC is that procedure for taxation can be decided by the members and they can elect to be taxed as a partnership or a corporation. The advantage in LLC Vs. S Corp is that LLCs are relatively easy to form and less cumbersome to operate. Members of an LLC can elect to be taxed as an S Corporation and avoid the double taxation of a C Corporation.
The legal structure you choose for your business should be in consideration of the risks and benefits it offers. Simply because a business structure has a few advantages over another, it is not prudent to adopt a business structure without weighing the pros and cons carefully. Likewise, choosing between an LLC or an S Corp depend on your business activities. Both the legal forms LLC or S Corp offers limited liability protection to its business owners, members in LLC and share holders in S Corp. Basically the holding structure is significant in adoption of LLC or S Corp for your business.
Limited Liability Company or LLC can be constituted with a single or multiple members under state statute. LLC is a relatively new form of business structure. Internal Revenue Service has not created a new tax classification for LLC. A LLC is still classified as a Sole Proprietorship, Partnership or Corporation for taxation purposes and the choice to elect the tax classification is left to the members. LLC members can be natural persons, other business entities and even aliens. In most of the states there are no restrictions on ownership. LLC provides the benefit of limited liability as a corporation with the flexibility of management and operations as a Partnership. LLC can elect to have pass-through taxation as in a partnership or sole proprietorship. Members can report their pro rata share of the LLC profit or loss in their personal tax returns and pay tax if applicable. Unless otherwise restricted in the Articles or Organization or Operating agreement, the membership in a LLC is easily transferable.
An S Corporation is no different from a C Corporation in form and structure. S Corporations are constituted by shares, which are easily transferable unless otherwise restricted in the Articles of Incorporation. The ownership has a few restrictions. S Corporations cannot have more than 100 shareholders; all shareholders must resident citizens and natural persons. There can only be one class of shares and dividend has to be distributed in proportion to the share holding. The main difference between a C and S is in taxation. C Corporations are subject to corporate taxes and have to pay tax on its profits. When the profits are distributed as dividend to share holders, they have to pay income tax on that which essentially is double taxation. S Corporations do not pay corporate tax but the shareholders report the profit in proportion to their share holding in their personal tax returns and pay tax. In LLC Vs. Corporation, the major advantages of LLC lie in its unrestricted ownership and flexibility in management. Corporations are subject to many formalities in incorporation and operations.
Choosing the right business structure for your business is important for many reasons. You have to consider a business form according to your unique situation that offers flexibility but provides personal liability protection. There are a few legal forms of business that offer both advantages. Corporations, Limited Liability Companies, Limited partnerships and Limited Liability Partnerships offer limited liability options to business owners. In limited partnerships, a general partner will have to assume personal responsibility for all the partnership’s business obligations. Limited Liability partnership limits personal liability of all partners but is restricted to specific professions or businesses in many states.
LLC definition is limitation of personal liability of the business owners. Limited Liability Companies offers limited personal liability and flexibility in management when compared to a Corporation. The member(s) of the LLC have the ease of management and administration of business as in a general partnership without its unlimited liability of partners. Another advantage with LLC is that you can choose the tax classification in which your business is to be taxed. If a single member LLC, you are by default treated as a sole proprietorship. Multiple member LLC’s can elect to be taxed as a partnership, C Corporation or an S Corporation.
Business owners in a Corporation are called share or stock holders and have limited personal liability. The share holder’s liability is limited to the capital invested by them in the business. Corporations are expensive to form and operate as the formalities and procedures involved are elaborate. Formal share holder meetings have to be held, the board of directors and officers elected, the proceedings formally recorded etc. Corporations can be a C Corporation or an S Corporation but the formalities involved are similar. A C Corporation is subject to corporate income tax whereas the S Corporation has pass through taxation. C corps have to pay tax on its income directly and when the profits are distributed to the share holders as dividend, they have to report the dividend as income in their personal tax returns and pay tax on it if applicable. S Corporation advantage is that, the income passes through to the share holders who pay income tax as their personal income.
The main difference between and LLC and a Corporation is that LLC’s are easy to form and operate when compared to a Corporation. In LLC vs. Corporation, LLC continuity is uncertain whereas the corporation has a separate existence from that of its share holders and ownership can be easily transferred. In LLC vs. S Corp, both has the advantage of pass through taxation but the operation of an S Corp. is formal and tedious in comparison.
Running a business has its benefits and risks. Choosing the right structure for your business is important in maximizing the benefits and minimizing the risks. If you are running a business that is almost a hobby and do not involve too many risks, you may choose to function as sole proprietorship or a partnership if two or more persons are involved. Both forms of businesses do not involve too many formalities to set up. Likewise, the tax return filing is also uncomplicated as the return of profit or loss from business can be filed along with the individuals or partners personal tax filings.
Limited Liability Companies or llcs are the most popular form of business entity for small businesses. Llc definition is in itself obvious regarding the liability of a member or owner for the business’s debts or risks. Llc provides protection to the members and limits their personal liability in businesses where risks are considerable. The main advantage of an Llc is that it has flexibility in formulating business and management policies. Forming an Llc and running it is expensive and strenuous than forming and running a sole proprietorship or partnership business. Forms have to be filed and fees paid for registration and other formalities and records of all business decisions and transactions have to be maintained.
Forming a corporation is necessary when the business contemplated is considerable in volume and the associated business risks are significant. Usually, large and medium sized businesses incorporate themselves to deal with complicated business issues and the statutes governing large businesses. Forming a corporation is costly and the formalities and procedures involved in a running corporation are cumbersome when compared to that of other business entities. Corporations are taxed on their profits directly and can retain the profits earned without distributing it among its shareholders which may help in saving some tax liability. How to incorporate yourself in the United States depend on the rules and regulations of the individual state where you plan to incorporate.
The differences in an Llc vs corporation are that, LLC are generally formed for small business operations as the structure offers flexibility in decision making and management. Whereas corporations are managed by a board or group of decision makers and involves formal procedures in making decisions and implementing policies. Owners or members of LLC’s are usually not free to divest or transfer their interest in the business. Stocks or shares in a corporation are easily transferable if not otherwise stipulated in the Articles.
When starting a business one of the first decisions that you will need to make is what type of business structure you are going to use. The most popular business structures are sole proprietorship, partnership, LLC, corporations, and S corporations. To make your decision you will need to compare the various business structures to see which will provide your business with the most benefits.
Most people start looking at LLC vs corporations because of how close they are. With both LLCs and corporations, you will be awarded limited liability for your business. This means that you will not be personal responsible for any debts that your business owes unless you have signed a personal guarantee. The one mistake that people make in regards to the limited liability in both corporations and LLCs is that they think when forming a corporation they are protected from everything. Looking at LLC vs corporations shows us that both business structures are only protected to a certain extent, the limited liability protection is voided many times through credit agreements because the business is to new to have established its own credit.
The LLC Vs Corporation shows us the difference in how each business structure is taxed. The LLC vs corporation taxes show us that corporations are not as flexible as LLC taxes. The LLC vs Corporation argument on taxes is that corporations are double taxed, while LLCs allow flow through taxation. Corporations are double taxed because the income that the corporation makes is taxed, but so is any income that is passed onto the owner. With a LLC if you choose to be taxed like a partnership or a sole proprietorship you benefit from flow through taxation, which allows your business taxes to be affect your personal income taxes. For example, any loss from your LLC will lower the amount of your gross income on your personal taxes, with a corporation the loss can only be used to reduce the corporation’s income in the future or the past few years.
The cost to incorporate the business is another thing to consider in the LLC vs corporation argument. Registering an LLC is going to vary based on where you plan to register your LLC, but can cost anywhere from $100 to $400. The biggest cost you incur with a LLC is the filing fee for your Articles of Organization. For a corporation the cost to register can be a few hundred dollars for a small business, but much higher for bigger businesses. The reason that the cost is so much higher for corporations than LLCs is because of how complex the legal structure is for a corporation. Corporations have more requirements to meet than LLCs so the filing fees start to add up.
One might make the argument LLC vs S corporation is going to be better than just a regular corporation might, but that is not the case. While the S corporation does have its benefits when compared to a regular corporation, it still has the same drawbacks as a corporation. One of the biggest benefits of having an S corporation compared to a LLC is the employment tax. With a LLC you are considered self-employed so everything that the business makes is subjected to a self-employment tax. With an S corporation only the salary that you are paid as an employee is subjected to the employment tax, any money that is paid as a distribution of profits is not subjected to the employment tax.
The one thing that you need to remember is that LLC vs incorporation can have its benefits, but it can also have its downside. You need to carefully compare the advantages and disadvantages of each structure before making your final decision.
