When starting a new business, one of the first decisions you’ll make is which entity form to use. The majority of business owners opt to form a corporation or a limited liability company (LLC). So what are the differences and benefits of an LLC vs. corporation? An LLC differs from a company in that it is owned by one or more persons, while a corporation is owned by its shareholders. Regardless of which organization you select, both provide significant benefits to your business. By incorporating a business, you can build reputation and professionalism. It also offers a limited liability insurance.
LLCs are subject to less record-keeping provisions than corporations. An LLC is not required to keep minutes, attend annual meetings, or have a board of directors. Some states continue to require LLCs to file annual reports, while others do not. Determine which criteria extend to your LLC agency by contacting your local Secretary of State.
Although each state has its own set of rules and regulations that apply to both corporations and limited liability companies (LLCs), corporations typically have more annual obligations than LLCs. Corporations are expected to hold annual shareholder meetings and record the minutes. In most cases, a corporation is also expected to file an annual report to keep the business’ information current with the Secretary of State.
By law, an LLC is taxed as a pass-through entity. This ensures that the company’s earnings are “passed through” to the owners. Profits and expenses are reported on the owners’ personal tax returns rather than the company’s. This makes filing taxes often simpler for owners of an LLC As a result, tax planning for LLC owners is often simplified. Any company losses or operating costs can be deducted on personal tax returns, which can help offset other sources of income. Additionally, forming an LLC allows business owners more versatility. An LLC may choose to be taxed as a corporation or a C Corporation. However, although filing an LLC as a C Corp makes financial sense for some companies, it is a rare option.
Corporations are taxed as independent legal entities that may produce their own revenue. Corporations must pay taxes on profits (corporate tax) as well as tax on dividends they allocate to their shareholders. Dividends are taxed twice because they are not tax deductible (unlike wages and bonuses). Double taxation is the term for this situation. This isn’t a problem for small businesses where only the owners work for the company. Owners get tax-deductible salaries and bonuses.
An LLC’s management framework is flexible. Any individual may serve as the LLC’s manager, and the organization can be managed by its members or a group of managers. The LLC can even choose to have no difference between a business owner and a manager. LLC management is less formal due to its flexibility, which could make it an ideal organization for certain businesses.
The management framework of a corporation is much more rigid. A corporation must have a Board of Directors in charge of managing the corporation’s profits for the shareholders. Corporate officers are in charge of the company’s day-to-day activities. Shareholders are considered the corporation’s owners but they are kept out of company decisions and day-to-day activities (except for approval of major corporate decisions). Individual shareholders may be elected as directors or named as officers but shareholders maintain the right to elect directors. The corporate bylaws, a comprehensive collection of rules adopted by the Board of Directors after the company is created, govern the individual rules of any corporation.