How to Decide to Have an LLC or Corporation
If you’ve decided that you need to form a business entity, then you need to ensure you choose the corporate structure that’s right for you. Two of the most popular structures are LLC and corporation. Which one is right for you?
What is the Difference Between LLC and Corporation?
LLC stands for “limited liability company” and is the newer, more flexible option. Persons who own parts of an LLC are called “members,” and ownership of the company is often titled a “membership interest.” LLCs tend to be more restrictive when it comes to owners: all owners of an LLC must agree if additional owners are to come on board, and often LLCs have to be dissolved if one of the partners wants to leave the business or files bankruptcy. LLCs are good for their flexibility and your ability to decide who becomes an owner of the company or not.
Related article: Survive Your First Year of Business With These Steps
Corporations
Corporations are the older structure, and if you’ve heard the term “shareholder,” then you know you’re dealing with a corporation. While LLC ownership is expressed in percentages, corporate ownership is expressed in number of “shares.” So if a corporation has 100 shares and an owner owns half, that owner owns 500 shares of the company, not 50% of it. If shares are publicly traded, then the people who own the company originally don’t have any say on who buys them, unlike an LLC where percentage of ownership is strictly guarded.
If you are looking to have outside investors involved in your business, then the corporation is the right corporate structure for your. Oftentimes venture capitalists and the like will not invest in an LLC.
C Corporations
Taxation is also a big difference between an LLC and a corporation. Corporations are either taxed as “C Corporations” or “S Corporations.” C corporations face a double taxation model, where not only are company profits taxed, but the profits that the shareholders generate are also taxed.
S Corporations
In S corporations, the double taxation is avoided. Instead of the company’s profits being taxed, only the profits that shareholders received are taxed.
LLCs are flexible and can choose to be taxed as either a C or an S corporation most of the time. There are some limits on an LLC choosing to be taxed as a C corporation, mostly regarding the size of the business. An LLC can also choose to be taxed as a sole proprietorship.
When deciding whether an LLC or a Corporation is the right choice for your corporate structure, make sure to consult with an experienced accountant. For other financial advice and lending opportunities, contact us at Casey Funding.
