Starting a business can be an exciting and challenging venture. One of the most important decisions you will make is choosing the type of legal entity for your business. Two popular choices are a corporation and a limited liability company (LLC). In this blog post, we will explain the differences between the two entities and help you determine which one is right for your business.
Corporation
A corporation is a separate legal entity from its owners, known as shareholders. The corporation can own assets, enter into contracts, and conduct business in its own name. Shareholders are not personally liable for the debts and obligations of the corporation. Instead, the corporation is responsible for its own liabilities.
One of the main benefits of a corporation is that it allows for the easy transfer of ownership. Shares of stock can be bought and sold, allowing for investors to come and go as needed. Corporations are also subject to a lower tax rate than individuals, and can deduct expenses such as salaries and benefits.
However, corporations also have some downsides, such as the risk of double taxation. Unless your corporation elects to be taxed as an “S-Corporation”, which imposes a number of strict requirements and conditions, the corporation is taxed on its profits, and then the shareholders are taxed again when they receive those profits as distributions.
Limited Liability Company
Like a corporation, an LLC is a separate legal entity from its owners, known as members. However, an LLC is taxed like a partnership, with the profits and losses passing through to the members’ individual tax returns. The pass-through of profits and losses means there is no business entity level taxation (although, LLCs can also elect to be taxed as a corporation if it makes sense for their business).
One of the main benefits of an LLC is its flexibility. An LLC has fewer regulatory requirements and the sky is (almost) the limit when it comes to structuring management or distributions of profits. However, always make sure to work with an experienced business attorney when drafting an LLC Operating Agreement, because all that flexibility can also be a trap for the unwary. For instance, an operating agreement can be used to distribute profits in ways that incentivize investment, but allocate profits and losses among members in ways that are the most tax advantageous, however complex safe harbor provisions must be included to avoid negative capital accounts. If that sentence doesn’t make sense to you, it may be time to speak with an attorney.
Which Entity is Right for Your Business?
Choosing the right legal entity for your business depends on several factors, including the type of business you are starting, your goals for the business, and your financial situation. Some businesses may benefit more from the liability protection and easy transferability of shares that a corporation provides, while others may prefer the flexibility and ease of management of an LLC.
At Cable Fleisher & Sosebee PLLC, we can help you evaluate your options and choose the right entity for your business. Contact us today to schedule a consultation and take the next step in starting your business.
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