It gives you the opportunity to present your firm to the public as a bigger company than it actually is. It also gives you a better shot at obtaining long-term financing. Because you are not held personally responsible for the corporation, your personal assets, including your personal bank accounts, may remain untouched if the business fails.
There are, however, more regulations and government filings to deal with than there are in sole proprietorships and partnerships. Incorporating or forming an LLC does require some work and some costs both to set up and to maintain. Keep in mind that the tax differences between an LLC and a corporation, especially a corporation that is not an S corporation, are significant. To minimize legal fees, you could obtain and fill out all forms for incorporation yourself.
However, prior to filing with the state, you should have your attorney advise you as to whether incorporation is the right step for your business. The LLC does not pay the taxes, but all the owners will, as per their rightful share of the profits on their income tax returns.
So, when should you choose to incorporate as an LLC? According to Witko, LLCs are the ideal entity choice for new businesses just starting out, as well as small businesses that expect to generate small profits or even incur losses. It is also easier to get an asset out of an LLC in the event the business fails. The lack of a balance sheet requirement makes corporate reporting far easier for an LLC than it is for a corporation.
Additionally, the straightforward transfer of assets out of an LLC makes it easier to dissolve the company or pivot your business model without jumping through regulatory hoops. Key takeaway: LLCs are extremely flexible legal structures that allow a sole proprietor or multiple owners to structure the business as they see fit. They are also pass-through entities, meaning no tax is owed on LLC income until the owners receive their share of profits, which are then taxed as personal income only.
A company with the "Inc. Like an LLC, these entities shield the owners and shareholders from personal liability for debts and lawsuits; however, these entities are taxed on their income. When owners and shareholders collect their share of the company's profits, those distributions are taxed again as personal income. Besides "Inc. C corporations are taxed on the income they make separately from any distributions to owners and shareholders.
Currently, the federal U. However, shareholders are typically employees who must pay employment tax on their W-2 compensation. An LLC makes the most sense for many small businesses, but an Inc. Similarly, if your business has shareholders, incorporating as a corporation is generally the best way to manage the company.
Corporations are also typically considered the ideal entity type for small businesses looking to pursue multiple rounds of financing to support rapid growth and scaling, such as a technology startup seeking funding from angel investors and venture capital firms. Key takeaway: S corporations and C corporations are different types of Inc. C-corps in particular are effective for rapidly growing businesses seeking investors. A business cannot be an LLC and a corporation at the same time.
It can, however, change its entity designation through a registration process with the government. Although the incorporation forms and the process to be followed may be slightly different in each state, corporations must typically file articles of incorporation and pay certain incorporation fees at the time of filing.
After the incorporation documents have been filed and processed, the corporation will be required to nominate a board of directors and, normally, a CEO and other corporate officers. It will also establish and vote on bylaws that set forth how the corporation will be operated and managed—such as the procedure for issuing stocks, dividends, bonuses, and similar financial concerns.
Additionally, the corporation must apply for an employer identification number EIN through the IRS so that annual corporate taxes can be paid, set up corporate bank accounts, and select a registered agent to receive and process correspondence, notices, and lawsuits. Once up and running, corporations may purchase or sell property, enter into contracts, and engage in a number of other business activities.
If the corporation is formed as a stock corporation, it's permitted to issue and distribute "shares" of stock to its shareholders, officers, and directors. LLCs, on the other hand, are not incorporated. They are "formed" or "organized. These documents generally include the certificate of formation or articles of organization.
Each document offers general information concerning the LLC, including the name, address, nature of the business, number of members, and similar topics.
And, instead of being guided by corporate bylaws, LLCs are normally governed by an operating agreement. The operating agreement provides the details regarding the company, including each member's initial financial contribution to the LLC, the voting rights afforded to each member, as well as the percentage of interest each member holds.
Finally, unlike corporations, LLCs don't issue shares; instead, the members of the LLC hold a percentage of "interest" in the company. So if the setup, rigid bylaws, and overall operation of a corporation seem too onerous, perhaps the simplicity and flexibility of an LLC is a better fit.
The primary benefit and most attractive feature shared by both corporations and LLCs is the fact that both entities remain separate and distinct from the owners. This is important because it allows the owners to avoid incurring personal liability for the corporation or LLC's business debts.
For instance, in the event of a bankruptcy or a legal dispute with the business, the owner's personal assets like bank accounts, homes, and cars are not typically viewed as assets of the company. In the case of a corporation, the shareholders, officers, board members, and employees are all shielded from the threat of taking on personal liability in the event a lawsuit is filed against the corporation, or if the corporation incurs a debt, expenses, or other liabilities or losses.
Similarly, the members of an LLC are protected against becoming personally liable for the LLC's losses, liabilities, or debts, just as they are immune from individual liability in the event a lawsuit is filed against the LLC, or if a collection action is pursued against the LLC. All corporations must file an annual report and convene an annual shareholders' meeting. During the annual meeting, minutes are kept and records of any significant matters discussed or decided upon are maintained.
Chief among the issues discussed at the annual meeting is the framework for issuing dividends, bonuses, and other forms of compensation. On the other hand, LLCs are not obligated to convene annual meetings or to maintain minutes of any company meetings. Additionally, except in some states, annual reports are not required to be filed. In many cases, it's the flexibility of the LLC which makes it such an appealing entity choice, especially among individuals who wish to operate a business and small businesses.
Corporations can be less attractive if you are someone who is not interested in keeping up with the rather onerous corporate requirements. When it comes to the differences between corporations and LLCs in terms of their tax structure, it's important to recognize that income that the corporation generates is subject to so-called "double taxation.
Conversely, for LLCs, the benefit at tax time is the array of filing options available. In this regard, LLCs are not locked into one particular tax structure or classification.
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