Limited liability companies (LLC) and corporations are two of the most common business entities. If you are ready to set up your own business, selecti
Limited liability companies (LLC) and corporations are two of the most common business entities. If you are ready to set up your own business, selecting the correct type of business structure for your needs is essential.
Both LLCs and corporations provide advantages for a business owner, but both have a distinct operating structure, credibility, and liability protection. In other words, each entity has its distinct strengths and weaknesses.
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What Is a Limited Liability Company?
A limited liability company is a business entity that offers the limited liability of a corporation. It also offers the pass-through taxation of a partnership or sole proprietorship. LLCs are popular because they provide the best of both worlds regarding taxes and liability protection.
One advantage of an LLC is that it limits the owners’ liability for the business’ debts and obligations. The owners are not personally responsible for the debts of the LLC if someone sues the LLC or the LLC goes bankrupt.
Another benefit of an LLC is taxation. LLCs offer pass-through taxation. Gains are “passed through” to the owners, and the government taxes the owners on their income tax returns instead of taxing the business profits.
The main disadvantage of an LLC is that it may not be available in all states. Some states do not allow the formation of LLCs for certain businesses, such as banks and insurance companies.
What Is a Corporation?
A corporation is a legal entity separate from its owners. A corporation has many of the advantages of an LLC, including limited liability and pass-through taxation.
The primary benefit of a corporation is it offers a great deal of flexibility regarding how the business is structured and operated. For example, a corporation can have multiple shareholders and provide different stock types.
Corporations can also raise capital more quickly than other business structures. Investors are more open to investment in a corporation than a sole proprietorship or partnership.
The main shortcoming of a corporation is that the owners may be held personally liable for corporate debts. This is known as “double taxation.” Double taxation occurs when the government taxes a business on its profits and the shareholder’s dividends.
What Are the Differences Between LLCs and Corporations?
The primary difference between LLCs and corporations is that LLCs offer the limited liability of a corporation. LLCs also offer the pass-through taxation of a partnership or sole proprietorship. In contrast, corporations provide a great deal of flexibility regarding how the business is structured and operated.
LLCs: Members or managers manage an LLC. The members are the owners of the LLC, and they elect the managers, who are responsible for running the business’ day-to-day operations.
Corporations: A board of directors typically manages a corporation. The shareholders elect the board of directors and are responsible for making decisions about the corporation’s operation.
LLCs: LLCs offer pass-through taxation. The government taxes the business owners on their income tax returns instead of the business’ profits.
Corporations: Corporations are taxed based on profits at the corporate level. The shareholders are then taxed on their dividends when they receive them. This is known as “double taxation.”
Taxes are one of the biggest challenges that owners of LLCs and corporations face. If a business’ taxes are not in order, it can break a business.
LLCs: LLCs offer limited liability protection to their owners. This means that the owners are not personally responsible for the debts and obligations of the business.
Corporations: Corporations offer limited liability protection to their shareholders. This means that the shareholders are not personally responsible for the debts and obligations of the corporation.
LLCs and corporations are both common, viable options for structuring a business. Each entity has its own advantages and disadvantages. When organizing your company, take time to select the structure that works best for you.