When you decide to build a business, one of your first major responsibilities will be to select a business entity. Your choice will affect your partners, your investors, your employees, and even your family. Which business entities can help you protect your personal assets from your business liabilities? Which work well for a business with multiple owners? Which will allow you to ensure that your private affairs remain confidential? Two of the most popular and beneficial business organizational structures are corporations and LLCs. Corporation vs. LLC: which is the best choice for your burgeoning business?
Corporation vs. LLC
A limited liability company (LLC) is a business structure that combines the limited liability of a corporation with the tax benefits and operational flexibility of a partnership.
A corporation is an independent legal entity owned by shareholders. Only the corporation is legally liable for the business’s actions and debts, not the shareholders who own it. Please note that this article focuses on standard C corporations, not S corporations.
Neither LLCs nor corporations restrict the number of owners the business can have. In a corporation, the owners are shareholders; in an LLC, the owners are members. An LLC can freely distribute its ownership stake (without taking the member’s contributions into account), and a corporation can do the same through a unique stock sorting system.
Corporations require a strict management structure in which directors make major business decisions, and officers are responsible for the day-to-day running of the business. The shareholders (i.e., the owners) do not make business decisions, but they do elect directors (and they can be elected as directors or appointed as officers). Corporations also require annual shareholder meetings and record-keeping duties.
LLCs, on the other hand, don’t require a formal structure. Many businesses prefer LLCs due to this flexibility. However, if you’re expecting to have a lot of investors, a corporation may be advantageous because the structure can handle many investors and owners.
LLCs cannot issue stocks, but corporations can. If you plan to have many investors, this will allow you to give them tangible ownership in the business. Stocks can also be a part of an employee incentive program, rewarding employees for their hard work.
LLCs do not pay taxes at a business level. Instead, they utilize pass-through taxation, requiring the business owners to report their incomes and losses on their personal tax returns. Corporations are taxed as separate entities and are subject to “double taxation”: the corporation’s profit is taxed once and then the dividends received by the shareholders are taxed again. Because the taxation of LLCs and corporations is quite complicated, it is highly recommended that you discuss your business’s tax goals and concerns with a lawyer and/or accountant.
So what do you think—should you use an LLC or a corporation? The overview above can help you decide, but remember that there are many more details and differences to consider. For guidance and support, contact the attorneys at Replogle, Tyrrell & Robertson. We can help you assess your business entity options while keeping important factors in mind, like privacy, partner rights, and asset protection. With our help, you will be able to make the best decision for your company. To get started, simply give us a call at 417-859-3979 (Marshfield office) or 417-893-5121 (Springfield office) or contact us online.