New business owners are often torn between choosing a limited liability company (LLC) or a corporation. The sooner you decide, the better it is for you and your business.
Protection is one of the many benefits of registering your business as a limited liability company (LLC) or a corporation. Operating an unregistered business in the U.S. puts you and that business at risk in case of a lawsuit or litigation.
Aside from the protection these business formations give your business, there are other factors to consider when choosing between an LLC and a corporation. Because there’s so much information to consider, we’ve created a two-part blog series to enlighten you on the differences between an LLC and a corporation, as well as the potential advantages of each.
This month, we’ll look at the differences between the two. Check back next month to learn more about the potential benefits and determine the best choice for your business.
Differences between an LLC and a Corporation
How do LLCs and corporations really differ? This question helps set a legal lens for examining the distinctions between these two business formations.
What matters most to you when starting your business? Here are some essential items to consider when selecting the best business formation for your individual goals.
Size of the business: The size of your proposed business can affect your choice of business formation. Additionally, the size of the business affects factors such as record-keeping, taxation, profit-sharing, and more. An LLC is your best bet if you’re looking at a small business. For example, managing tax filings for a 2-person LLC is considerably simpler than handling them for a corporation with 50 employees, where the annual filing load increases with each added employee. And if you’re looking to go big from the get-go or plan to grow your business in the future, possibly going public, a corporation is the best answer.
Management structure: Running a corporation requires a structured approach to business. In Georgia, your corporation needs to comply with certain governance obligations:
– Establish a board of directors who are responsible for making business decisions, subject to shareholder approval.
– Conduct annual meetings to discuss corporate matters.
– Maintain detailed minutes from these meetings.
– Ensure all required filings are submitted on time.
These requirements lend precision to your corporation and keep it on track.
On the other hand, an LLC is more flexible in its management structure. You can decide whether to have different decision-makers, especially if you choose not to register your business as a partnership.
Transferability of ownership: In either a corporation or an LLC, ownership transfer depends on the entity’s structure. Bylaws for corporations and Operating Agreements for LLCs are the governing documents and should be tailored to your needs by an attorney. With the proper structure, either entity may freely allow transfer of ownership or place restrictions on transfers.
Taxation: Taxes are a significant factor when choosing between an LLC and a corporation. The way your business pays taxes for these two entities is different. An LLC is flexible and allows the ability to select from different tax options. If you run an LLC, you can be taxed as a partnership, sole proprietorship, S corporation, or C corporation. On the other hand, corporations only have a few options. They are either taxed as S corporations or C corporations.
How Different Forms of Business are Taxed
Partnership and Sole Proprietorship: Registering your business as a sole proprietorship or a partnership means your net income is taxed. Your net income is the profit you have left after subtracting your expenses from your income. This might be an ideal choice for a small business making little profit or a business just starting.
S Corporation: A business registered as an S corporation doesn’t pay income tax directly. Their shareholders pay income taxes on their dividends (profit). That’s a way to avoid double taxation — an edge S corporations have over C corporations.
C Corporation: Taxes are paid in C corporations twice — income tax by the business and separate income tax by the shareholders. A C Corporation pays a double tax because the company pays taxes on profits, and the shareholders still pay personal income taxes on their dividends. This is typically more widely adopted by larger businesses.
Now that you know the main differences between these two formations, next, we’ll go into more detail on the benefits of each one. In the meantime, if you have questions about navigating complex business issues, don’t hesitate to reach out to our office. We have decades of experience working with businesses and helping them stay in compliance with state and local laws and regulations.