Firstly, they are both registered business entities. Each of which offers its unique benefits and features.
What is an LLC?
Limited Liability Corporation (LLC), is a registered business entity. For legal purposes, LLCs are regarded as separate entities. As they protect personal assets in the event of the business being sued. They also provide the benefit of pass-through tax entities. This is because members have the benefit of declaring their profits
What are the advantages of an LLC’s?
The most important advantage is that LLC’s are rather flexible when it comes to management composition, taxation, and governance.
Pass-Through Taxation
For LLC’s the default tax structure is that of pass-through taxation. This allows that an LLC is not taxed twice. The decision is still for the business to make, if for some reason the owner feels that they would prefer for the business to be taxed differently, one which is more beneficial for the business, then the owner has the option to choose the tax structure which works best for the respective businesses.
The advantage of inexpensive registration and filing fees
When compared to Corporations, the fees involved to register and maintain an LLC are far lower.
What is a Corporation?
A Corporation is also a registered business entity that is treated as a separate legal entity from its owners and it is also guided by a board of directors. When compared to LLC’s, the shareholders from corporate entities also enjoy limited liability protection, as the assets of shareholders are shielded by the business in the event of any legal action. Corporations are also considered as separate entities for all tax purposes. So the profits of corporations are taxed before being distributed and then shareholders are also expected to report their share when submitting their tax returns.
What are the advantages of Corporations?
Choosing the formation of a Corporation brings the benefit of ease when it comes to raising capital and also the ability to transfer ownership.
The advantage of unlimited capital-raising potential
The fact that a corporation is a stock structure, allows for the business to easily raise capital. A corporation’s stock structure can make it easier to raise capital for the business. Unlike LLCs, corporations can sell shares of the company to easily raise funds.
What are the tax advantages?
Yes, corporations are at a disadvantage when it comes to tax, as they are subjected to double-taxation, but there are some tax benefits as well. Corporations have the advantage of deducting employee salaries, fringe benefits including any company related losses incurred as a result of the business’s taxable income and therefore they are not subjectable to self-employment taxes. Corporations also have the option to keep and reinvest profits back into the business to cover any costs incurred as well to increase stock valuation.
What are the similarities and differences between Corporations and LLC’s
The biggest similarity is that they are both business entities.
The Formation Process
The process for forming an LLC is straightforward. It is a six-step process, select the state, name the LLC, choose a registered agent, file the formation documentation, create the operating agreement, and finally get the EIN.
The process of forming a Corporation can be achieved by following a six-step process, selecting the state, name the corporation, choosing a registered agent, choosing the initial directors as well as the share structure, file the formation documentation and finally get an EIN.
Ownership and Responsibilities
LLC’s have the option of structuring the formation as either a single-member or a multi-member. Then there is also the option of electing to be a member-managed or a manager-managed business structure. The owners of a corporation are referred to as shareholders. The shareholders have the responsibility of electing the board of directors, who will be responsible for making any major decisions that concern the company.
Taxes
Considering that according to the IRS LLC’s are taxable entities, they can, therefore, elect to either be taxed as C Corporations or S Corporations. By default and LLC will be taxed as either partnership or a sole proprietorship, this depends on the number of members that the business has.
Deciding on which business structure can be rather daunting. In the end, the decision is still yours to make. For more insight into LLCs vs Corporations click here.
