Forming a Corporation vs. LLC
This article is designed to help you figure out whether a corporation or a limited liability company (LLC) is best for your business. Which one is going to be better for your business? Which one will be easier to create and maintain? Although this article cannot give you a firm answer one way or the other, it will attempt to show you the advantages and disadvantages of both corporations and LLCs.
Is an LLC Right for You?
Many small businesses may find that the flexibility and simplicity of a LLC makes it the better choice when it comes to forming as a corporation versus an LLC. If you plan on your business owning property, you will seriously want to consider forming your business as an LLC to avoid the problem of double taxes.
This issue may crop up if the business is formed as a corporation. This double tax problem arises if the business owns property that appreciates in value and the business is formed as a corporation.
When this happens, both the corporation and the shareholders are taxed by the increase in property value when the property is sold or when the corporation is liquidated. Owners of an LLC, however, avoid this double taxation problem because the business' taxes are "passed-through" to the owners of the LLC, meaning the LLC is not a tax entity in itself and does not pay taxes on its income.
Is a Corporation Right for You?
There will often be factors that make a corporation (C Corporation) the better choice when it comes to the corporation versus LLC decision. These factors could include:
Large Number of Investors or you Plan on Raising Money from the Public
Providing Benefits to Owners
Retaining Good Employees.
Is an S Corporation Right for You?
Under an S corporation, you only pay self employment taxes on money you receive as compensation for your services, not on the profits that pass through the corporation to you. To make this clear, suppose you get $80,000 from your S corporation for the year, $60,000 of which was compensation for your services to the corporation. You will only pay taxes (15.3 percent) on the $60,000, not on the additional $20,000.
If your business were formed as a LLC, however, you may have to pay self employment taxes on the entire amount of business profits that pass through to you automatically.
Get Legal Help Understanding the Difference Between Corporations and LLCs
As you can see, corporations and LLCs each have their own advantages and disadvantages. Whether you're considering forming a corporation or an LLC, it's best to contact a business organizations attorney to guide you through the process of starting your new business.