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.
