Starting a Business LLC vs. Corporation: What's the Difference? LLC vs. Ready to form your business? Let's get to it. Create your corporation or limited liability company today. Have a question? Our incorporation specialists have the answer. Below are several of the steps involved in forming an LLC. However, please check with your local state since they may have additional forms and requirements.
It's important to note that the above list is not comprehensive since each state may have additional requirements. Once established, many states require LLCs to file an annual report, which the state may charge a fee.
These fees can sometimes run in the hundreds of dollars per year. There are distinct advantages and disadvantages to establishing and operating a limited liability company. LLC Pros As stated earlier, an LLC gives the owner or owners limited liability, which means that each owner is not personally liable for any company related lawsuits or any debts that belong to the company.
In other words, creditors cannot take or collect money from your personal assets to satisfy the debts of the business. Creditors are only able to take assets from the company. LLCs are simpler to establish and operate when compared to a corporation.
Corporations typically must have appointed directors, officers, and board meetings. LLC's also have tax benefits since the company's income, or losses are reported on the owner's personal tax return. This prevents the profit generated from the business from being taxed at the business level and also taxed again at the personal level when the owner takes a salary from the company.
Instead, the profit from the business passes through the business entity and is only reported once for tax purposes on the owner's personal tax return. Another benefit of LLCs is that they are extremely flexible when it comes to their structure.
There are no limits to the number of owners, called members, and LLCs can operate with only one owner, similar to a sole proprietorship. LLCs also allow the owner to designate a manager to run the business, which could be one of the designated members, a non-member, or some combination of both. If the LLC had gotten turned down for a bank loan, it could be difficult for the owner to attract money from outside investors. A corporation might be able to raise cash from venture capitalist firms, which provide money to businesses in exchange for a share of the profits.
Venture capitalists usually only fund corporations and not privately owned LLCs. An LLC can be more costly to form and operate when compared to a sole proprietorship or a partnership.
As stated earlier, there can be filing fees for an EIN number and also annual fees for filing the annual report. The choice of business entity is going to be guided largely by the nature of the business and how the owner envisions the business unfolding and growing in the future. An S corporation 's structure also protects business owners' personal assets from any corporate liability and passes through income, usually in the form of dividends, to avoid double corporate and personal taxation.
The IRS is more restrictive regarding ownership for S corporations. These businesses are not allowed to have more than principal shareholders or owners.
S corporations cannot be owned by individuals who are not U. Further, the S corporation cannot be owned by any other corporate entity. This limitation includes ownership by other S corporations, C corporations, LLCs, business partnerships, or sole proprietorships. There are significant legal differences in terms of formal operational requirements, with S corporations being much more rigidly structured.
The numerous internal formalities required for S corporations include strict regulations on adopting corporate bylaws, conducting initial and annual shareholders meetings, keeping and retaining company meeting minutes, and extensive regulations related to issuing stock shares.
Further, an S Corporation may use either accrual or cash basis accounting practices. In contrast, S corporations are required to have a board of directors and corporate officers. The board of directors oversees the management and is in charge of major corporate decisions, while the corporate officers, such as the chief executive officer CEO and chief financial officer CFO , manage the company's business operations on a day-to-day basis.
LLCs and S corporations are business structures that impact a company's exposure to liability and how the business and business owner s are taxed. S corporations can elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. The shareholders of the S corporation would report the flow-through of income and losses on their personal tax returns. As a result, the assessed tax would be calculated based on their individual income tax rates.
This pass-through feature helps S corporations to avoid double taxation, meaning the company's income is taxed at the corporate level and again when dividend income paid to shareholders is taxed on their personal income tax returns. S Corporations must use Form S to file their taxes. Form S is a tax document that is used to report the income, losses, and dividends of S corporation shareholders. The fees to establish an S corporation can vary significantly, depending on the complexity of the corporation and state in which it's established, but some of the fees can include:.
There are distinct advantages and disadvantages to establishing and operating an S corporation. Some of the advantages include:. Pros An S corporation usually does not pay federal taxes at the corporate level.
As a result, an S corporation can help the owner save money on corporate taxes. The S corporation allows the owner to report the taxes on their personal tax return, similar to an LLC or sole proprietorship. An established S corporation can help boost credibility with suppliers, investors, and customers since it shows a commitment to the company and to the shareholders.
S corporations allow the owner to benefit from personal liability protection, which prevents personal assets from being taken by creditors to satisfy a business debt. Corporations may sell shares of company stock to raise capital. This offers expanded opportunities for growth, especially for C Corporations, because they can have an unlimited number of shareholders and issue multiple classes of stock. If a Corporation files as an S Corp, it may issue only one class of stock and cannot have more than shareholders.
The LLC and corporate entity types continue indefinitely perpetual existence , even if members or shareholders leave the business or pass away.
Therefore, to officially close an LLC or Corporation, the business owners must file Articles of Dissolution with the state. However, if owners intend to operate the business for a limited duration, they may state a dissolution date or term of existence in their formation documents or LLC operating agreement or corporate bylaws.
However, if approved by the IRS, the LLC may allocate profits and losses of the business to its members as agreed upon by all of the members.
This allows the business owners to consider not only monetary contributions but also expertise and participation in running the LLC in determining profit distribution. Dividends can only be paid pro-rata proportionately to share ownership. Corporations must have a board of directors to establish policies and oversee the business to ensure it is in compliance with regulations and follows its bylaws.
Officers of the Corporation appointed by the board of directors manage the day-to-day management responsibilities. The laws of the state—which vary from state to state— govern LLCs and Corporations. Generally, LLCs have less government oversight and fewer formalities than Corporations.
Failure to stay on top of compliance tasks may result in fines, penalties, loss of liability protection, and even involuntary dissolution forced closing of the business entity.
We make everything easy for you so that you can focus on what you do best—running your business! Compare that to what an attorney might charge for the same service!
Because of our personalized service and commitment to excellence and value, CorpNet stands out from other online document filing services. Their shareholders pay personal income taxes on the profits that are paid to them as dividends. Not all corporations and LLCs can be taxed as S corporations. A corporation that is ineligible for S corporation taxation must be taxed as a C corporation, while an LLC can also choose to be taxed as a sole proprietorship or partnership.
However, it can be expensive for a business that makes a lot of money: unlike corporate shareholders, sole proprietors and partners are considered self-employed and will be expected to pay Social Security taxes up to the maximum and Medicare taxes on all their profits.
Get help starting your business. Learn More. Contents 4 min read Get help starting your business. About the Author Jane Haskins, Esq. Related Topics. Facebook Twitter. This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law. You may also like.
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