What is best for your business?
When you start a new business, one of the first questions you’re asked is the structure of your business. Two of the most common types of business structures are LLCs and corporations. While many small businesses start out as LLCs, there are some situations where a corporation can make sense — both at founding and in the future.
Today, we’ll review the pros and cons of each business structure and look at industries and financial situations that may play a role in your decision. Ultimately, these decisions are best made with the guidance of a small business and CPA attorney who has reviewed your financial situation and business plan, but educating yourself before going to those meetings will help you know what questions to ask.
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What is a limited liability company?
LLC means limited liability company. An LLC protects your personal assets from creditors and lawsuits that come after your business, limiting your liability. There are some things you can do to strengthen your liability protection, such as mixing personal and business bank accounts or assets.
An LLC is run by members – or owners. There is no need for a board of directors, but you can have a board of directors if you want to organize your business this way. When you file your taxes as an LLC, you can claim the income on your personal tax returns instead of worrying about corporate taxes.
Advantages of an LLC
- Limited liability protection.
- Less paperwork and legal oversight from the company.
- It is taxed as a pass-through entity without the threat of double taxation.
Disadvantages of LLC
- Liability is limited, which is better than a sole proprietorship but does not provide the same level of liability protection as a C corporation.
- Owners are responsible for both the employer and employee portions of FICA taxes.
- It can have investors but cannot issue shares.
What is the company?
There are many different types of companies. Most often, we think of a C-suite, but a company can also be:
- S company: This structure can be used in two different ways. It can be used by a company to pass along its revenues to its shareholders, allowing them to avoid double taxation. It can also be used as a tax election by an LLC to help owners reduce their FICA tax burden.
- Non-profit organizations: Board members cannot benefit financially from the organization. If you want the entire organization to be tax-exempt, you will have to take an extra step and file for your current nonprofit corporation’s tax-exempt status with the IRS.
- Professional Company (PC): Common in professions including law, medicine, and engineering. It provides liability protection for each board member when other board members have problems with negligence or malpractice, but it does not provide protection when you yourself have those same problems.
- Closing the institution: This is also sometimes known as a closely held corporation and is only available in some states. The number of shareholders is usually limited to about 30 or 50, and shareholders are usually more actively involved in day-to-day operations. Depending on state law, there may be less regulatory oversight and formal requirements than a traditional C corporation.
- Company B: Abbreviation for benefit corporation. Available in most states. It indicates that the company serves a larger social or environmental interest. This “greater good” must be demonstrated according to established standards of accountability and transparency.
- C company: Increased liability protection on an LLC. Owners can deduct a wider range of personal medical expenses, which is the easier structure to attract investors.
- S company: It allows shareholders to avoid double taxation or reduce FICA taxes.
- Nonprofit organizations: If you seek 501(c) status, the organization can be tax-exempt. Donations to the company may also be tax deductible for donors.
- Professional organization: Protects you from negligence or malpractice claims against your fellow board members.
- Closing the institution: It usually requires less organization and oversight, which can lead to reduced expenses. Contributors can participate in daily activities.
- Company B: The ability to attract investors or run marketing campaigns based on the “greater good” your company serves.
- C company: Subject to double taxation.
- Company S: A limited number of investors, and all investors must be local.
- Nonprofit organizations: Neither the owners nor the board members can profit from the business. Any profit must be reinvested into the nonprofit.
- Professional organization: There is no protection from liability if you individually face a negligence or malpractice claim.
- Closing the institution: The number of contributors is limited – usually a maximum of 30 or 50. There may be restrictions on transferring stock certificates depending on the state.
- Company B: Additional transparency and accountability requirements without any real taxes or legal benefits to a C corporation.
What do an LLC and a corporation have in common?
“Both corporations and LLCs are distinct legal entities, separate from their owners,” said Laura Norris, director of the Entrepreneurial Legal Clinic at Santa Clara University.
“Owners of LLCs and corporations have limited liability for debts and other obligations
Company. Both of these legal forms require formalities such as registration
Entity with appropriate jurisdiction, and continue to maintain registration and
Pay the appropriate fees.”
Common fees and registration requirements for both LLCs and corporations include:
What are the main differences between an LLC and a corporation?
There are two main factors that distinguish an LLC and a corporation. Most of them relate to organizational structure and taxes.
History and organizational structure
“You can trace the history of corporations back to an act of parliament in the Netherlands in the 17th century,” said Jim Cunningham, a partner at Cunningham Law Firm in California. “He gave the structure of companies. The incorporation of a company makes it a legal entity in its own right. It has formalities and internal laws. Whereas a limited liability company only needs members who do not have all the additional structural requirements.
LLCs first began to appear in the 1970s, but they did not begin to gain traction until the 1990s. Much of its popularity can be attributed to the tax advantages it offers over Corps C.
LLC vs. Corporation: Differences in Taxes
C corporations must pay taxes before distributing dividends to shareholders, and then shareholders must pay taxes on those dividends on their personal tax returns. With an LLC, everything is through and through, so the owner(s) only pay personal income taxes on profits. Double taxation is not required.
An LLC or corporation can choose to be taxed as an S corporation, which is a pass-through entity. This allows corporations to avoid double taxation and LLC owners to reduce a portion of their FICA taxes. S corporations also have disadvantages, such as limiting the number and nationality of investors in a way that LLCs and LLCs do not.
What is best for your business?
Deciding whether you should create an LLC or a corporation depends entirely on your business situation. Keep in mind that just because you start with one doesn’t mean you can’t switch to the other – it will require some paperwork, but it doesn’t always have to be your decision.
When should you choose an LLC?
“Most small businesses benefit from LLCs because there is less corporate formality,” Cunningham said. “Corporations must hold annual meetings—and those meetings usually have lawyers involved, which adds to the cost. With an LLC, the only thing you’ll really need is a roster of members.
Cunningham also points out that LLCs are favored in some industries, such as real estate. On top of the tax advantages, a company may create multiple LLCs in different states to take advantage of each state’s different definition of limited liability. This is an advanced strategy that should only be implemented with the right legal counsel.
When should you choose a company?
“Recommending a type of business entity requires a deep understanding of a particular company’s business plan and the circumstances of its owners, so I don’t have a one-size-fits-all recommendation as to when to prefer one company over another.” Norris said.
“However, one of the benefits of the corporate form is that it has been around for a very long time. Investors, shareholders, employees, partners and customers sometimes feel more comfortable doing business with a corporation rather than an LLC.
Norris points out that you have the option of starting out as an LLC, then switching to a corporation business structure later if you find that to be a sticking point for potential investors.
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Frequently Asked Questions (FAQ)
- body c.
- S body.
- Non-profit organizations.
- Professional companies.
- Business closures.
- B companies.