If your a business owner wanting to incorporate your business, you may find yourself wondering which business type to choose. The new company structure can fall into two categories, a limited liability company (LLC), or a corporation. Having a clear understanding of each structure will allow you to feel confident in which one you choose for your business. No matter which structure you choose, they both have their advantages and disadvantages. The article below will be discussing the advantages and disadvantages of each business structure so you can decide which will be right for your business.
Pros of LLCs
Choosing an LLC to structure your business comes with many advantages. Members are not personally liable for some or all the actions of the company and their personal assets are protected. An LLC has a pass-through entity, meaning the business profits are not taxed by the government on a company level. Instead, members’ federal income tax returns get taxed. Filing taxes is easier this way than if the business was taxed on a corporate level. An LLC can be formed with as little as one person or many members with the choice to managed by all its members. This is helpful is some of the members are not experienced in managing a business and want to hire people that are experienced. The cost of paperwork and fees to start up an LLC is are relatively low, although, each state varies in what they charge in fees and taxes.
An LLC can be formed with as little as one person or many members with the choice to managed by all its members.
Pros of Corporations
Corporations are considered an independent legal entity owned by individuals or entities who are shareholders. Like an LLC, a Corporation offers shareholders limited liability protection from the businesses actions and debts. Shareholders personal assets are protected and they are only liable for their stock investment in the business. The corporation can raise money for the business by selling stocks to investors willing to invest capital in the business. The corporate business has a management structure which includes directors, officers, and shareholders who establish power. Each group has its own set of roles and responsibilities. As long as corporate regulations are met, a business can exist indefinitely.
Cons of LLCs
There are some disadvantages to running an LLC. The liability has its limits, meaning a judge can rule that your personal assets are not protected by your LLC structure. You are at risk if you don’t clearly separate business transactions from personal or if you have been running the business fraudulently causing losses for others. Another disadvantage is the publication requirements or renewal fees for an LLC can be costly, depending on your state. Many states have franchise or capital values tax on LLCs and they can range from a flat fee to an amount based on the company’s revenue. It might be hard to raise financial capital in an LLC as investors are more likely to put their money into a corporation. As an LLC member, you may be faced with self-employment tax. The IRS considers LLCs the same as partnerships for tax purposes and considers members to be self-employed unless members opt to be taxed as a corporation.
The liability has its limits, meaning a judge can rule that your personal assets are not protected by your LLC structure. You are at risk if you don’t clearly separate business transactions from personal or if you have been running the business fraudulently causing losses for others.
Cons of Corporations
Establishing a corporation can be expensive and time-consuming. Another major disadvantage is the double-taxation. In some instances, the company pays taxes on profits and individual stockholders are also taxed who earned profits from the corporation in the form of dividends. This happens most often in large corporations and may not serve as an issue for stockholders and owners of a small corporation who are paid salaries rather than dividends. The law requires corporations to observe a number of corporate formalities to guarantee its operating as a separate entity that’s independent of its businesses owners. Regular director meetings, keeping records of corporate activity, and maintaining the financial independence of the corporation are all steps in observing corporate formalities.
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