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Corporation vs. LLC: What’s the Difference?

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The World Bank gave the US a score of 91.6 out of 100 for the ease of starting a business. This means creating a business in the US is relatively straightforward.

But, if you want to start a business, first you need to know about the different business types. For example, will you be forming a corporation or an LLC? Then, you have to learn how to register the business in your state.

Not sure where to get started? This article will tell you all you need to about corporations, LLCs and how to create them.

What Is a Corporation?

Corporations have a long history in the US. A corporation means your business becomes incorporated. Companies that are corporations have Inc. at the end.

The owners of a corporation are the shareholders and not individual people.

This is because corporations issues shares. The shareholders own a percentage of the company based on how many shares they own. So it’s easy to transfer shares.

Corporations offer a predictable structure and eternal life. This is important if you ever plan to seek investors. Professional investors and venture capitalists usually only invest in a corporation.

Corporations have strict management structures. For example, a corporation requires a board of directions who oversee the company and officers for daily operations.

They also require an annual shareholder meeting, annual reports, and other recordkeeping.

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The most significant difference between a corporation and an LLC is the tax structure.

S-Corporation vs. C-Corporation

S-corporations are more similar to LLCs. But, an S-corporation is a tax classification, and an LLC is a business entity.

S-corporations have pass-through taxes, which the article will discuss later.

Conversely, the government taxes C-corporations separately. Moreover, C-corporations may also be subject to double taxation if the company distributes corporate profits to owners as dividends.

There are restrictions on S-corporations about their owners. The regulations limit the number, type, and who or what can own it.

S-corporations also allow owners to use losses as deductions on personal tax returns. This can help save money on self-employment, Social Security, and Medicare taxes.

On the other hand, C-corporations allow owners to hold various stock interests with varied dividend payouts.

Forming a Corporation

Forming a corporation requires filling out corporation organization documents. The state calls them Articles of Incorporation. Then, you have to create a board of directors. Last, you agree to bylaws or an operating agreement.

The operating agreement is a contract you use to manage daily operations and document each member’s ownership share. It also lays out roles and responsibilities.

What Is an LLC?

A Limited Liability Company (LLC) is similar to a corporation but has more flexibility. Plus, it is more formal than a sole proprietorship or partnership.

Management and taxation are different with an LLC. Usually, it has fewer documentation requirements too.

As stated, LLCs have pass-through taxation. You don’t pay taxes on a business level. Instead, you report income and losses on your personal tax return to the IRS.

The flexible management structure means you can control daily operations and long-term strategies. Additionally, there are fewer compliance requirements, state-mandated annual requirements, and ongoing formalities.

An LLC protects you from being held personally liable for the actions of your LLC. For example, if there is a lawsuit against your business, the LLC protects you and your personal assets from risks.

An LLC is simple like a sole proprietorship with the liability protections of a corporation.

The owners of an LLC are its members. Each member owns a percentage of the business, called the membership interest or owner’s equity. The owners of an LLC invest in joining or creating the company.

However, there are restrictions on transferring LLC membership interests. The limitations and general process vary from state to state.

The members, or a group of managers, manage the business like a traditional business partnership. Sometimes members don’t have formal titles.

Unlike corporations, LLCs don’t have a tax classification. They can choose how they want to be taxed. They can choose from a sole proprietorship, S-corporation, or C-corporation based on their business metrics.

Most people choose to form an LLC rather than a corporation because of its ease of doing business. They are an excellent choice for small, owner-managed businesses.

Forming an LLC

One or more business people can form an LLC. First, you file Articles of Organization with the state where you are doing business. Then, you create an operating agreement. However, the government doesn’t require operating agreements for LLC.

Yet, the government highly encourages them.

How to Start a Company

You create both LLCs and corporations the same way. You need to file formation documents with your state of doing business.

Both business types give owners liability protection. As mentioned, this means owners are not personally responsible for business obligations. But, they both require that operations are separate from the owners to maintain this protection. This is the “corporate veil.”

Mixing business and personal finances can make you personally liable for business actions and debts.

If you’re still unsure about which business type you need, you can ask yourself these questions:

  1. Who is starting the business?
  • Member(s) or shareholders?
  1. What do I want the management structure to look like?
  2. How do I plan to pay taxes?
  3. What is my long-term business strategy?
  4. Will I seek outside investors?

After answering these questions, you can read through this guide again to see if you should choose an LLC or corporation. Indeed, this information will ensure you make the best decision for you.

Start Your Business Now

Forming a corporation or LLC is not a difficult task. The first step in starting your company is to choose which type of business you want to create. Then you can get started on the paperwork.

Whichever you decide, remember to have a strong company plan, stick with compliance, and plan for the future.

If you found this article helpful, make sure you don’t miss any other important information in the rest of the blog.

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Some other articles you might find of interest:

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