LLC vs Incorporation: Which Should I Choose?

A C-corp can raise capital by selling shares of stock, making this a common business entity type for large companies. The advantages and disadvantages of a corporation must be considered before you incorporate your business. Some of the biggest benefits of this business structure include access to funding, limited liability protections, and an unlimited lifespan.

Differences between an LLC and a corporation

A corporation can be owned by individuals and/or other entities, and ownership is easily transferable via the buying and selling of stock. Since a corporation is its own legal entity, it can enter litigation on its own, which protects its advantages of owning a corporation owners from personal liability in the event of legal action. Like a C-corp, an S-corp is composed of shareholders, directors and officers and follows the corporate regulations in order to enjoy the same protections from personal liability.

Corporations: Pros and Cons

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LLC vs. Incorporation: Which Should I Choose?

With a Corporation, shares of ownership can be sold, gifted, or bequeathed to others. To form a corporation in the U.S., it is necessary to file articles of incorporation with the state in which it will be registered. In the U.K., Ireland, and Canada, corporations may use the abbreviation Ltd., which stands for « Limited, » after the company’s name. Incorporation can be ended using the process called liquidation. This may result from a voluntary decision to cease operations or may be forced by the financial collapse of the business. A company appoints a liquidator who sells the corporation’s assets.

For their owners, both a limited liability company (LLC) and a corporation offer similar legal advantages. A primary advantage is that shareholders cannot be held personally liable for the debts of either entity. Most corporations face double taxation (C-corps), which means that the business income is taxed at the entity level as well as the shareholder level (based on their percentage of profits earned). S-corps eliminate this problem by only taxing each shareholder on their individual income and not at the entity level. However, the IRS has been known to pay closer attention to S-corps and even tax them as C-corps if their records fail to meet the legal requirements. A corporation provides more personal asset liability protection to its owners than any other type of entity.

A corporation has most of the rights and obligations of an individual, such as being able to enter into contracts, hire employees, own assets, incur obligations, and pay taxes. The interests of shareholders are represented by a board of directors, which they elect. Traditional corporations, called C corporations, are separate tax entities according to the IRS and must pay the federal corporate tax rate.

Ask a Financial Professional Any Question

For specific questions on whether the corporation is the best structure for your business, it is best to seek the advice of an attorney or accountant. An LLC only limits liability; it doesn’t establish anything about the structure of the business. Another major disadvantage is the differences among states in the statutes that govern LLCs. This can lead to uncertainty for LLCs that operate in multiple states.

• The type of legal structure you eventually decide to use for your company can play a significant role in the success or failure of this venture.
• Don’t try to proceed on your own if you’re not certain of what’s required for your business, as regulations vary and can change.
• We believe everyone should be able to make financial decisions with confidence.
• Certain states may have stricter requirements for nonprofit corporations.
• Although accountants do not necessarily follow tax laws in setting accounting principles, they do so in this case because organization costs are usually not material.

Stockholders

As an individual starting their own business, it’s important to understand all of the nuances involved and choose the right structure for your company. LLCs aren’t tied to one particular tax classification and can be taxed as sole proprietorships, partnerships, C corporations or S corporations. The board of directors comprises a group of individuals who are elected to represent shareholders. They are tasked with making decisions on major issues affecting the shareholders, and they also create policies to guide the management and daily operations of the corporation. A corporation is required to name a board of directors before it can commence operations, and the members of the board of directors are elected by shareholders during the annual general meeting. Each shareholder is entitled to one vote per share, and they are not required to take part in the day-to-day running of the corporation.

Difficult to form

Business owners may elect to operate as a sole proprietorship, partnership, or limited liability company (LLC) instead. These business structures treat company debt and taxes differently than compared to an incorporated entity. These are different from smaller types of businesses such as sole proprietorships and partnerships in many ways. There are many advantages and disadvantages of corporations as a type of business. Overall, corporations are more regulated than many other types of business structures. Perhaps the biggest difference between LLCs and corporations is how they’re taxed.