Starting a business can be an exciting but daunting process. One of the first decisions you need to make is what type of legal entity your business should take on. Choosing between a corporation (inc.) or a limited liability company (LLC) may seem overwhelming, but with some knowledge, it can be quite simple!
In this article, I'll explore the differences between these two entities to help you make the best decision for your business.
What Are Corporations?
The most common form of business entity is the corporation. This entity includes the shareholders, the company's owners, and the directors. The directors manage the company on behalf of the shareholders. A board of directors typically oversees a corporation's operations. However, smaller corporations may have only one director.
Corporations also offer protection from personal liability because they are considered legally separate entities from their owners. Any debts or liabilities incurred by the corporation will not affect its owners. It also offers greater flexibility when raising capital since corporations can issue shares in exchange for funds.
What Are LLCs?
Knowing what an LLC is is important.
A limited liability company (LLC) is a business entity that offers some distinct advantages over corporations. Unlike corporations, which have shareholders, LLCs have members. Depending on the type of entity created, these owners may be one or many people.
An individual managing member is responsible for running an LLC's daily activities, while all other members are passive investors who do not participate in management decisions. LLCs offer more significant tax advantages than corporations as profits and losses "pass through" to members rather than being taxed at both the corporate and individual levels, as is the case with C-corps. Additionally, LLCs require less paperwork and formalities than corporations, making them easier to maintain in compliance with state regulations.
What Are The Differences Between LLC And Inc.?
When starting a business, you want to ensure it is properly formed. You can choose from several different structures, including Limited Liability Companies (LLCs) and corporations. Each structure has its benefits and considerations, so understanding the difference between them is vital. Let's break down the main differences between LLCs and incorporation so that you can decide which is best for your business.
Incorporation Process
Incorporating a business involves filing formation documents with the state government and establishing bylaws. Incorporations also require nominating board members, applying for an employer identification number (EIN), setting up corporate bank accounts, selecting a registered agent, and more.
Additionally, corporations must file annual reports with their state of formation to stay in good standing. These filings include information about the corporation's directors, members, officers, address changes, financial statements, etc.
LLC Formation Process
Unlike corporations, Limited Liability Companies (LLCs) are not incorporated but rather "formed" or "organized," requiring one or more forms to be filed to include information about their name and address. Rather than being governed by binding corporate rules like corporations, LLCs operate under an operating agreement that outlines each member's contribution in monetary terms as well as voting rights they hold within the company.
The operating agreement should also specify how profits will be distributed among members and how decisions will be made within the company hierarchy. Depending on your state of formation, other forms may be required, such as articles of organization or certificates of organization for LLCs to comply with state laws about LLC formation requirements and federal employer identification numbers (EIN).
Despite having different formation requirements, LLCs and corporations offer comparable protections against personal liability for debts incurred by the business entity itself. However, in some cases, courts have found certain individuals within the company personally liable even after forming an LLC or Corporation due to a breach of fiduciary duty or negligence on behalf of directors/members/managers/officers, etc.
Therefore it is vital to take precautions when setting up these entities, including but not limited to following internal policies/procedures outlined in governing documents such as operating agreements/bylaws, etc.
The Benefits Of An LLC For Your Business
Incorporating a business is a significant decision. When deciding between an LLC and an Inc., it can be daunting to understand the differences and how they will affect your business. One of the main advantages of setting up an LLC instead of a corporation is that it provides much-needed flexibility in that no annual reports or shareholder meetings are required! Let's explain why LLCs are such an attractive option when considering setting up a business.
Limiting Liability
An LLC offers limited liability protection, meaning that owners have limited financial risk in their company. Owners are not personally responsible for any debts incurred by the company, which gives them peace of mind if something were to go wrong.
This also means creditors cannot come after owners' assets to pay off company debt. This is one of the main reasons many small business owners opt for an LLC over other forms of incorporation.
Tax Flexibility
LLCs offer more tax flexibility than corporations because they can be taxed as sole proprietorships or partnerships, depending on their circumstances. This allows them to avoid double taxation, which often occurs with corporations where income is taxed at the corporate level and then again at the individual level when profits are distributed to shareholders as dividends.
Simpler Management Structure
LLCs require less paperwork and formalities than corporations, meaning you don't need to hold regular meetings or keep detailed minutes like you would with a corporate structure. This makes managing an LLC much simpler and straightforward, allowing owners more time to focus on running their businesses rather than worrying about filing paperwork and adhering to legal requirements.
Filing Form 8832 As An LLC
An LLC is a perfect business entity for those looking to bypass the hassle of double taxation. All profits and losses are passed through directly to the owners, who pay taxes at their rate on personal tax returns as opposed to paying corporate tax. To opt into this 'pass-through' advantage, however, some may need to take an extra step by filing Form 8832 Entity Classification Election with the Treasury Department before they can reap these rewards!
Form 8832 allows LLCs to elect how they will be taxed. By default, all LLCs are considered "disregarded entities" for federal tax purposes. Any profits and losses are allocated directly to their owners, who then report them on their tax returns (instead of having to pay corporate taxes). Filing Form 8832 allows you to ensure that your LLC is being treated as a "disregarded entity" so that you can take advantage of this pass-through taxation benefit.
If you have established an LLC with more than one owner or member, then it is likely that you will need to file Form 8832 to ensure that your business is being taxed correctly. This form should be filed with the Treasury Department at least 75 days before the desired election date (the date you want your business structure change to take effect). However, if you fail to file this form within 75 days, you may still be able to retroactively make an election up until three years after the original desired election date.
It is important to note that if your LLC has one owner/member and has elected S Corporation status by filing IRS Form 2553, you do not need to file IRS Form 8832 since S Corporations automatically receive pass-through taxation benefits without needing additional paperwork.
Taxation Of C And S Corporations
Understanding the taxation of corporations can be daunting. There are two distinct varieties, C and S Corporations, each with its own rules and regulations. It is essential to know how these taxes work so that you can make informed decisions when it comes to forming a new business.
C Corporations are subject to corporate income tax, which means that corporate income is double-taxed for shareholders. The first tax applies at the corporate level when profits are earned, and the second is when funds are distributed as dividends to shareholders as part of their income. This double taxation makes C Corporations less attractive for companies that expect large profits or those looking for tax savings on their investments.
S Corporations have some advantages compared to C Corporations in terms of taxation. Only a single tax applies with an S Corporation if certain shareholder requirements are met. For instance, all shareholders must be individuals (no other corporations) and be related by blood or marriage (family members can count as one shareholder).
Furthermore, there must be just one kind of stock issued by the company to qualify as an S Corporation – no different classes of stockholders allowed! Another critical factor is that the number of shareholders must remain below 100 at all times, or else the corporation will no longer qualify as an S Corporation and become a C Corporation.
Staying Compliant: Inc. vs LLC Taxes
Operating a Limited Liability Company or corporation comes with different expectations and responsibilities. Business owners must comply by filing their annual report, paying any applicable franchise taxes, and having a registered agent on record and a designated office address. This ensures all the necessary information about the company, such as its name, principal address, agents, and managing officials, are readily available to state authorities. Failure to abide can result in hefty penalties, possibly leading to the dissolution of operations!
The annual report is usually filed through your Secretary of State Office. The purpose of this document is to provide an update that includes changes in the company, such as address changes or addition/termination of officers, if there are any. It's also used for tax purposes and should be submitted every year without fail. Depending on your state, the due date for filing may vary from January 1st to April 15th (in some cases, even later).
Not filing your annual report can have serious consequences, such as hefty fines or loss of limited liability status, if applicable. It also signifies that you're not actively conducting business anymore, which can eventually lead to revocation/dissolution of operations. Make sure you know when your due date is approaching, so you have time to prepare. Most states will give you at least 30 days before they start levying fines or other penalties.
Your report should include all relevant details about your business, such as business name, registered agent name and contact information, principal address, and list of officers/members (if applicable). If you own more than one business entity, make sure each has its own separate filing document – failure to do this can lead to confusion. Additionally, if you want your LLC or corporation status kept intact, ensure all franchise taxes are paid on time too!
What You Need To Know About Choosing A Registered Agent
As a business owner, you are responsible for many administrative duties, including appointing a registered agent.
A registered agent, also called an "agent for service of process", is the individual or company appointed by your business to receive legal notifications from state authorities. If you are learning how to start an LLC or corporation (inc.), it is required that your business appoints a registered agent to comply with state laws and regulations.
The importance of appointing the right registered agent cannot be overstated. A qualified and reliable registered agent will ensure that your business's legal paperwork and notices are received promptly and per the state laws and regulations. This means that there is less risk of your LLC or Inc. being subjected to fines, penalties, and other legal action due to non-compliance with filing requirements. Furthermore, having a reliable registered agent can help ensure that any lawsuits filed against your company are served on time so they can be responded to quickly and appropriately.
When selecting a registered agent for your LLC or Inc., you must consider several factors, including LLC costs, experience level, customer service reputation, availability, and reliability. Make sure you do some research before making any decisions. Ask for recommendations from other business owners who have had success with their chosen registered agent for LLC, and read online reviews to get an idea of how well others have enjoyed their services.
Additionally, make sure you check with the Secretary of State in the states where the entity will be doing business if they have any restrictions in place when appointing an out-of-state agency as your registered agent.
What Is The Difference Between LLC And Inc? - FAQ
The main difference between an LLC and Inc. is the type of legal structure, which affects how taxes are paid and recorded. An LLC offers flexibility in management and taxation options while incorporating comes with many benefits, such as limited liability protection and potential tax breaks.
It depends on the startup's goals, size, and structure. LLCs may be more suitable for a smaller business or sole proprietorship, as they are easier to form and have fewer regulations. They offer more protection from liability and access to certain tax benefits that an LLC does not have.
Whether an LLC or an Inc is the better choice for a small business depends on the business's particular needs. An LLC is often the preferred option for smaller businesses because it has fewer reporting and formalities requirements and flexible management options.
However, an Inc may provide additional liability protection and access to certain tax benefits that an LLC does not have. Ultimately, it depends on the individual circumstances of your business.
The type of LLC license required will depend on your business and where your business is located. Generally, a license or permit may be required to legally operate a business in the state or locality where it is based. It is essential to contact your local government for specific licensing requirements for your particular industry.
Yes, any money that owners end up paying themselves from an LLC is considered income and must be reported on your taxes. Understanding the difference between taking a salary or wages as an owner and taking distributions from the LLC is essential, as this will affect how your income is taxed. Be sure to consult with a tax professional for more information about reporting LLC income.
Conclusion
Choosing between a corporation or an LLC for your business depends on several factors, including how many owners there are, what types of investments you want to attract, how much paperwork you want to complete, etc. Corporations offer more flexibility when it comes to raising capital. In contrast, LLCs provide more tax benefits and fewer paperwork requirements than corporations, making them easier to maintain in compliance with state regulations.
Ultimately whichever type you choose should depend on your specific needs and goals for your business!
Thanks for reading - we hope this information has been helpful!
