Starting a business is an exciting time for any entrepreneur; with that comes many decisions. One decision when forming your business, what type of company do you want to create? The two main choices you have are a limited liability company (LLC) or a corporation (incorporated or “inc.” for short).
There are various advantages and disadvantages to choosing an LLC or corporation. These differences are in how the company structures its management, finances, taxes, and legal liabilities.
Limited Liability Company
An LLC can be created in the United States by anyone, even if you are not a United States citizen. There are various and sometimes tedious, complex steps to complete the LLC formation process.
The first step is to decide on a company’s name. There are some restrictions on what you can call your LLC. Choosing a unique name helps differentiate yourself from others; avoiding any trademark violations will also protect you from legal issues later on in your business’s life.
As an LLC, you need to decide what type of LLC you are creating. A single-member LLC is taxed as individual sole proprietors, but S-corporation LLC is subject to income taxes on your your Salary.
Corporations “inc.”
Like you can form your business into an LLC, you can create and incorporate your business. A corporation may also be a nonprofit organization or a government of a new city or municipality. A corporation is owned by its shareholders, who all possess equity, “stock” in the company.
In the United States, there are common factors of information that are required for all types of corporations, business purpose, corporation name. Registered agent, share par value, a number of authorized shares of stock, directors, preferred shares, officers, and the address of the company. Additionally, the United States offers protection to corporations, such as free speech and the right to contract. These benefits have been outlined over a series of Supreme Court cases.
There are several benefits to incorporation from a legal perspective. The most important of which is liability protections. In a corporation, there is the protection of the business’ shareholders’ assets.
C and S Corporations
Your company can have a C or S status as a corporation; this will calculate income tax very differently. The company pays tax on their income for a C corporation, and the owner or employee also pays income tax on whatever income they received. An S corporation doesn’t pay tax, but instead, the owners report all the company’s revenue as personal income.
Choosing whether to file as an S Corp or C Corp is a complex decision; S Corp’s tax returns are usually more straightforward than C Corps. But it can vary case by case
Legal liability
All registered businesses need to meet certain requirements dictated by the entity state to maintain liability protection and keep it in good standing, corporations have more legal requirements than. LLCs
Most state require LLCs to have a registered agent and file annual report or franchise tax reports to maintain an active status. The annual report form will ask you to ensure you have updated information pertaining to your business and you will have to pay a filing fee
Corporations also need to file an annual report, but additional documents need to be maintained as bell. This includes corporate minutes on shareholder meeting and information on its board of directors. There may be additional paperwork required such as C corps needing to undergo a verification process and proof its meeting its transparency requirements
Differences in Taxation for Owners of Corporations or LLCs
LLCs are taxed as pass-through entities, and that means that their members are taxed on their share of the profits. In contrast, a corporation owner is taxed only on the actual amount they receive as dividends.
If you are interested in learning more about starting an LLC or incorporation, please speak to one of our specialists at Nimrod Yaron & Co.
