Corporation or LLC? Which is Best Suitable For Your Business?


 

llcbiz

When you are thinking to incorporate, you may find yourself wondering which business type to choose. Someone may tell you that “Corporations are too complex. Just form an LLC.” or the other ones may tell you that  “Don’t form an LLC. Form a corporation.” With this confusion going in your head, you may need to get a clear understanding of your options. So let’s sort out your confusion by comparing both LLC and Corporation. But first, know what exactly is an LLC and Corporation.

What is an LLC?

A limited liability company (LLC) is a business structure in which the members of the company cannot be held personally liable for the company’s liabilities or debts. Limited liability companies are usually hybrid entities with the characteristics of both a corporation and a partnership or sole proprietorship. The main highlight of an LLC is the availability of flow-through taxation to the members of an LLC, which means that the profits and losses are directly passed through your personal income without facing corporate taxes. The members of an LLC are recognized as self-employed and are required to pay self-employment tax contributions towards Medicare and Social Security.

Advantages of LLC:

  • LLC offers their members protection from the liabilities.
  • LLC is not recognized as a separate entity for tax purposes.
  • Running an LLC is manageable and flexible.
  • You can create the rules that govern your business

Disadvantages of LLC:

  • No specific roles assigned such as managers, directors or employees.
  • It provides self-employment taxes.

Conclusion:

Hence, Limited liability companies are flexible when it comes to taxes, offering lots of options so you can create a tax plan that works for you. This simplicity, protection, and ease of use have made forming an LLC a popular choice for small businesses.

What is a Corporation?

A Corporation is a legitimate entity with its own rights and obligations. It can be built up as both profit-making and non-profit association. Also, it can be held publicly or privately. The taxation of a corporation entirely depends on your choice of incorporation. You can choose between a “C” corporation or an “S” corporation.

What is a C Corporation?

A C corporation is usually known as a regular corporation. It is observed as an individual entity, which means it is independent of its owners. This means the personal assets of the owners are not at stake. So once the business is incorporated as a C Corporation, the shareholders are protected by the corporate veil or limited liability.

What is an S Corporation?

The S corporation combines the characteristics of both C Corporation and a sole proprietorship. A S corporation avoids the double-taxation experienced by C corporations by protecting against personal liability and allowing you to pay income taxes on your personal tax returns. S corporation involves only eligible shareholders. The shareholders cannot be more than 100 shareholders. Also, it must have only one class of stock.

Conclusion:

So how do you choose between an S Corporation and a C Corporation? Generally, C corporations make no sense for small businesses due to double tax on income. Also, if by chance you go under losses, you want to claim them personally, favoring an S. Hence, whatever you decide, get some advice, and pay attention to the tax rules.

How are LLCs and Corporations Formed?

Limited Liability Company (LLC) An LLC is formed by one or more business partners cum owners. The owners need to check the name availability and file Articles of Organization and set out an Operating Agreement.

Starting a Corporation:
A Corporation is a separate legal entity. The owners need to check their company’s name availability. Then, the company can be formed by filing corporate organization forms in the state where the corporation is located, and by designating shareholders, each with a specific number of shares. The corporation also needs to create a Board of Directors to oversee the corporate business.

Additional Services for LLC and Corporation

While setting an LLC or Corporation in Nevada or Wyoming, you may need help of a professional company providing you with some of the additional services.  These additional services include:

  • Wyoming Corporation & LLC Set Up: Planning to start a business in Wyoming? Decide the type of business structure you want to incorporate your business into. Wyoming offers several benefits for corporations and businesses that will aid in the growth of their business. Also, there are no personal income taxes, no corporate income taxes Wyoming tax system and privacy of company owners.
  • Nevada Corporation & LLC Set Up: Thinking of starting your business in Nevada? You can easily get the professional services in Nevada to incorporate your business in your desired business structure. Many businesses that flourish in Nevada enjoys the perks like no corporate income tax and no taxes on corporate shares.
  • Virtual Address and Mail Forwarding Services: Once you have set up your business in Nevada or Wyoming, you need a registered address to receive your important mails. You can choose from the various companies providing these services. They can receive emails on your behalf. Check out the plans offered by various companies providing re-mailing and scanning services.
  • Registered Agent/Resident Agent: Nevada State laws require business entities to maintain a Resident Agent physically located in Nevada. Nevada Resident Agent must be available during regular business hours. Contact the companies providing these facilities and check out their various plans for registered agent.

LLC or Corporation? Making Your Choice

Pass-through business structure vs. non pass-through entity

An LLC is recognized as a pass-through entity, similar to a partnership or sole proprietorship. It means that the business is not itself liable to pay income taxes on its profits; instead, any profit or loss is passed through to the owners and is reported on their personal tax returns.

By contrast, a corporation is recognized as a separate legal entity. So it is responsible for submitting a tax return and pay income taxes on its profits. It can result in “double taxation.” For small businesses, where it is required to take out profits out of the business, double taxation can be expensive.

Keep in mind that an LLC can choose to be taxed as a corporation or an S corporation, whereas a corporation can elect as an “S corporation” to be treated as a pass-through tax entity like an LLC.

Employee benefits

While considering the perks, there are some main differences between an LLC and a corporation. Firstly, the stock option,  retirement plans, and employee stock purchase plans are only available for C corporations. Also, LLC members along with S corporation shareholders who own more than 2 percent of the business are required to pay taxes on certain employee benefits like employer contributions to HSAs or FSAs, health benefits, and life insurance benefits. The owners of a C corporation do not have to pay taxes on these benefits.

Social security and Medicare taxes

Since LLC members are not considered as the employees of the company, so their share of the profit is not subject to Medicare tax or social security. However, with a corporation, only the salaries are subject to  Medicare taxes and social security. Any profit distribution isn’t subject to these taxes.

Note that if an LLC can opt to be taxed as a corporation, only the member’s salary is subject to Medicare taxes and social security and not the profit distribution.

The Ability to deduct a loss

C corporation shareholders cannot deduct the business operating losses, but S Corporation shareholders can. Also, LLC members who actively work in the business are able to deduct these losses on their personal tax return to offset other income.

Conclusion:

Hence, you need to think about your financial situation and future plans to determine the optimal business structure for your needs.