Many business owners choose to have a company help them decide which type of business is best. It’s important to learn the differences in forming an LLC vs corporation. Understanding a few key differences in these types of business may help you figure out which to form. There are key benefits of an LLC as well as starting a corporation. In this post, you will learn the differences between forming an LLC vs corporation.
Choosing Legal Entity Type
One of the first things to take care of is determining the entities of your business. There are two main entity types to take care of which are legal and tax entities. It’s understandable to get these two entities confused. Determining whether to be an LLC or corporation is done to determine a legal entity. A tax entity involves whether your company is a partnership, proprietor, or corporation. In regards to choosing a tax entity, there is no option for LLC. New and experienced entrepreneurs have gotten the legal and business tax entities mixed up in the past. You’ll find that New York, Nebraska, and Arizona require that a formation of an LLC is to be posted in a local newspaper.
Filing Business Taxes
You’ll find that taxes are vastly different when looking at an LLC vs corporation. One of the biggest LLC advantages occurs when it’s time to file business taxes. Not every business owner enjoys taxes but forming an LLC may make tax time a bit easier. The Internal Revenue Service classifies an LLC automatically as a partnership or disregarded entity. Many see the tax leniency to be an advantage when choosing an LLC. Corporations are taxed two times over, once from corporate tax and the other is an individual tax. People choosing to start a corporation might want to check into becoming an S-corp, as these entities pay no corporate tax. However, not every business can qualify for this corporation designation.
Another thing to think about when looking at an LLC vs a corporation is business ownership. You will find that LLC ownership is defined in one of two ways either by percentage or units of membership. A corporation is owned by shareholders that hold shares. An LLC can have company percentages that don’t follow capital input rules. A corporation will distribute dividends in proportion to the input of capital unless they are an S class corporation. Daily operations are a bit more structured when you start a corporation. There is a hierarchy to be followed within a corporation that allows members of the board to have control over operational decisions.
Safety in the Courtroom
When looking at starting an LLC vs corporation, you’ll want to think of any future legal issues. There are a set of laws that govern a corporation that has been formed for a long time. The benefit of corporate laws is that any proceedings are fairly straightforward. However, an LLC is a more recent business type than the more traditional corporation. Each state throughout America has different laws in place for an LLC. If an LLC does business in multiple areas without the country, it makes laws more difficult to fully understand. Neither an LLC or corporation is unfavorable to own when dealing with legal issues. However, the corporate law system has had more structure since it has been utilized for a longer time.
In closing, there are several differences in an LLC vs corporation. The first thing many new business owners look at is determining the legal entity type to choose. It’s imperative to understand the difference in taxes between an LLC and corporation. Some people prefer starting an LLC because of tax flexibility. There are advantages to creating a corporation, especially for those who prefer a more corporate structure. Any business wants to be fully prepared for future legal battles. A corporation typically has a set of uniform standards when dealing with legal issues. An LLC has differing laws that become confusing to understand without legal representation. It makes sense to have a company help you determine whether to be an LLC or corporation as this is a huge decision.