Selecting the right business entity can be one of the most critical decisions a business owners makes while setting up the venture anywhere in the world. There are many different entity types and many other factors which come into play while determining the right business structure. You have to consider the level of the formality and structure, business model plan, the possible tax advantages, where you want to conduct your dream business, sources of investment, and the desired specific goal of your business.
So, are you ready to start your business in the US? Many investor and business owners may find themselves asking what the significant difference between LLC and Corporation is? OR which business structure is the best for their venture?
Well, whichever way you choose to form your business, you’re going to look more legit than the other guys. As a matter of the fact that every situation is different, and every company has its own requirements. So take a minute to consider your short-and long-term business goals to figure out which structure is best for you in order to enjoy more and more benefits associated with it.
Because the best choice can get your business started off on the right foot, maximize your two personal return, and give your company stability in the future. Think about both your long-term and short-term goals, and prioritize the latter if you can afford to.
Let’s sort out the differences between a Corporation and an LLC so you can decide which business type is best for your business.
What stands for LLC and INC.?
If you have done good research work for your business entity, you may have noticed that business names often end with an abbreviation such as Inc. or LLC. So you must be curious about what do those abbreviations mean in the business entity name? In fact, what are an LLC and Corporation? And “is an LLC a corporation?”
Well, the straightforward answers to your first question are that the LLC and Inc. are the abbreviations for different kinds of business entities in which “LLC” stands for “limited liability company.” The abbreviations “inc.” and “corp.” indicate that a business is a corporation.
What are the Limited Liability Companies and Corporations?
So, now you have understood the meaning of this abbreviation, the next thing you must be considering about what are an LLC and corporations? Well, Corporations (Inc.) is an independent legal entity, separate from the people who are owning it, managing and controlling it. In short, the corporation itself, not the shareholders who own it, is held legally liable for the actions and debts the business incurs.
On the other hand, Limited Liability Company (LLC) is a business structure that combines the pass-through taxation of the sole proprietorship or partnership with the limited liability of a corporation. LLCs also provides its owners with limited liability for company debts.
Is an LLC a Corporation?
As a matter of the fact that the corporation and the limited liability company (LLC) both establish the business entity as its own entity with a legal existence separate from that of its owners, who are called “shareholders” in a corporation and “members” in an LLC.
So, you must be thinking about “is an LLC a corporation?” Because both business forms provide limited liability from suit for the torts of company employees or other members or shareholders. But despite their many similarities, however, there exist several significant differences. An LLC is a “Limited Liability Company” not a “Limited Liability Corporation.” An LLC is not incorporated; it is thus not a corporation.
What are the Difference Between LLC and Corporation?
Business goals aren’t one size fits all, and neither is incorporating. When deciding which kind of corporation fits your business strategy, consider some of the differences that each type offers. Below mentioned are some of the difference between the Corporations and LLC that you should know.
Taxation
One of the significant difference between LLC and corporation is tax-related. Whether a legal entity is a taxable entity and the type of tax entity that it is, it all depends upon how the Inland Revenue Service classifies it and perhaps the local and state authorities.
Well, legal entities, such as corporations and LLCs, are the different types of tax entities depending on how they are formed. In fact, Corporations can be taxed in one of the two ways such as it can be taxed as S- Corporation or C- Corporations. If your business is incorporated as C- Corporation, then you have to pay federal income tax on your corporate profits, and your shareholders are also required to pay tax on any dividends that they receive. Since the dividend amounts are taxed at both the corporate and personal level, this is referred to as “double taxation.”
But in the case of C- Corporation, you can set up medical reimbursement and other employee benefits and deduct the costs associated with running these programs from your corporate taxes. However, S- Corporations are a good choice for people who would like the protection and structure of a corporation, and have 100 or fewer shareholders and can avoid the issue of double taxation. They are also great for businesses that have significant start-up costs because of their flow-through taxation.
On the other hand, an LLC is treated as a “pass-through” entity which means the members of an LLC are allowed to pass their share of the company’s profits to their personal income tax return. As a matter of the fact that, a single-member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed as a partnership. An LLC has a single layer of taxation, and the company is now required to file taxes on the business level.
Formalities
The second difference between the Corporations and LLC is that Corporations have more requirements to adhere to regarding record keeping than the LLC. Corporations are required to maintain a ledger detailing how the company reached crucial decisions. They are also expected to hold a board of directors that sets policies and oversees the business and hold at least one meeting per year, which may have to occur in the state where the company is incorporated. Its officers manage a corporation’s day-to-day affairs.
However, LLCs are a newer concept because LLCs do not have to adhere to the same record-keeping requirements. An LLC can be managed by its members or by a group of managers and does not have to hold an annual meeting. Furthermore, LLCs are not required to create financial statements that detail the company’s economic status.
Ownerships And Stocks
In a corporation, the owners are called “shareholders” and an LLC, they are known as “members.” Once you understood the taxation and formalities of LLC and Corporations while setting up a new business entity, the next difference between the Corporations and an LLC is that an LLC has complete freedom to distribute its ownership stake to its members without any regard to a member’s capital contribution to an LLC.
This becomes important when profits are allocated to each member. Although an individual member may not have invested as much as another member, an LLC’s operating agreement may specify that all members receive an equal share of the profits. Unlike the Corporations, an LLC cannot issue stocks as a way to raise capital and cannot have an initial public offering that allows the investors to invest in the business. A corporation can attract investors by publishing various classes of stock and can attract employees by offering shares of the company. This hurts an LLC’s ability to expand, meet obligations and finance the company’s operations.
Transferability
The next difference between LLC and Corporations is that they also differ regarding their transferability. In some states, LLC’s terminate when the member goes bankrupt or dies, whereas shares in a corporation can become the property of a bankruptcy estate or be inherited. In fact, Corporate shareholders can transfer the voting rights that come along with their stock, whereas an LLC, the one who assigns an interest can only transfer the economic rights incident to that interest and not the right to participate in the management of the company.
Conclusion
By now that you must be having a profound idea about the difference between the Corporations and an LLC’s because there is no single rule of thumb which can determine which entity is best. Well, a corporation and an LLC offer a great mix of potential disadvantages and advantages to every individual business, and if you are willing to make the right decision the tax consequences can be a deciding factor.
