LLC vs Corporation: Who Should Use Which Entity?

Is contemplating the pros and cons of LLC vs Corporation giving you anxiety? It’s understandable—there are definitely benefits to both structures.

But which is best for you? It’s a question only you can answer.

Instead of worrying about the future, focus on the immediate task of getting your business off the ground. Businesses can restructure and partners or investors added and removed.

That’s not to say you don’t need a plan or to give thought to where you see your business going. Over 95% of business owners overestimate their initial performance. Be realistic about your business and your situation and most of all stay informed.

Let’s take a walk and talk about your options.

Benefits of an LLC

The benefits of an LLC are many and varied. There are some benefits shared by an LLC and an S Corp or C Corp, but neither corporate structure can match the flexibility of an LLC.

Some examples of where an LLC outshines an S Corp, which is its greatest competitor, might be:

  • Ownership by another business entity
  • Unlimited number of owners
  • Ownership by a non-U.S. citizen or resident
  • Distributing special allocations is permitted
  • Annual meetings are not required
  • Minutes from meetings are also not required

A big plus toward LLCs is that every state handles them in a different way (like a corporation). This acts toward your protection.

When considering this benefit, it’s good to know more about LLC management in different states. This can help you find out which state might be the best option.

Finally, the tax system that makes S Corps popular is similar in an LLC. It’s a simple tax structure where profit and loss are taken into account on the owner’s personal taxes.

This streamlines the process and allows business deductions on personal tax filings.

Why Bother With a Corporation?

When it comes to weighing the benefits of an LLC or corporation, you need to consider current flexibility vs future growth. If you think explosive growth is likely and you want investors, corporations are your thing.

The biggest difference, in fact, between corporations and LLCs is that a corporation is composed of shareholders, and an LLC is not.

But, which common incorporation method do I choose? Let’s take a look at the two most used: C Corp and S Corp.

C Corporations

This is the type of corporation you envision when you think of businesses like Microsoft and Wal-mart. Tesla and other multinational corporations on the stock exchange depend on this type of structure to leverage economy of scale.

If you’re looking for foreign investors or are a non-U.S. Citizen, you can put stock in this option. Though, it means that your company could end up owned by someone else and you could get pushed out of your own business.

Since it has a high potential for growth, there should be a drawback, right? The tax structure is such that there is no tax pass-through for investors and all dividends are double-taxed. The only exception of salary getting taxed is the owner.

On the up-side, almost everything is federally tax-deductible, which uses a tax break to make up for the double taxation.

S Corporations

S corporations are a major contender to LLCs because they share some similar characteristics. This is why people consider LLCs to be a “hybrid” between a self-proprietorship and a corporation.

One of the main features of an S Corp is that it still receives investment through a shareholder system. It requires annual meetings, minutes, and other regular meetings, though. Also, it allows for tax-passthrough to the owners and avoids double taxation.

The drawback is that there are limitations to those who can invest and own. Non-U.S. citizens and residents are not eligible for holding shares (and thus investing) as well as owning.

LLC vs Corporation: What Do I Need?

All forms of business structure can be state-based and never-ending, but there are different benefits and drawbacks to consider.

LLCs and corporations also have different protections from one state to another and are not created equal. LLCs and Corporations also have different rules. Just because one state has good rules and protections for LLCs doesn’t mean it will for a corporation.

For this reason, it’s worthwhile to check and see which state might be best for your LLC and which one might be best for your corporation.

Another thing to consider is the foreign ownership or investment option. It could mean that an S Corp is off the table.

Lastly, the size of your organization is a major contributor to weighing options. S Corporation use is allowable for organizations comprised of 100 or fewer persons, as well as an LLC.

For example, you only have the option of going with an LLC if you are not a U.S. resident or citizen and have fewer employees than a C Corp allows.

Meeting Adjourned

Deciding on the benefits of an LLC or corporation can be tough, but you can do it!

Remember the flexibility benefits of an LLC when deciding on which business structure to use. The tax deduction potential, combined with investment options are the main takeaways of a corporation.

When answering the question: “Should I use an LLC or corporation business structure to achieve my goals,” remember that, in the end, they are your goals.

That being said, business consultation or management companies help in a huge way to find the perfect fit for you if you are still confused.