What are the Advantages and Disadvantages between Forming an LLC or a Corporation?
It is important to understand the differences between the various types of business formations. The right one for your needs and type of business matter. Learning the advantages and disadvantages of each option can help you make your final decision. The decision can influence the business’s operations, investing, liability, and taxes.
The options are:
- LLC
- C-Corporation
- S-Corporation
LLC
Limited Liability Companies
A Limited Liability Company is often known as LLC. This is a good choice for a sole proprietorship or a partnership business. There can be more than one partner in the mix. There is no limit to the number of individuals that can be part of an LLC and it is considered as a separate legal entity from each of the individuals.
ADVANTAGES
- The primary advantage of LLC is that it protects your personal assets.
- Should the company be named in a lawsuit, they cannot come after your home, vehicles, or money that you have in personal accounts. They can only pursue funds from the business or assets in the name of the business.
- You do not need a board of directors or shareholders with LLC.
- You have plenty of options regarding how you can set up the management and overall structure of the business.
- LLC gives you options for how the business will be taxed. You can select to be taxed as a corporation. Taxes for a pass-through business (the selection for most LLC) means that the individuals are taxed on the business profits.
DISADVANTAGES
- It can be hard to raise money for LLC through investors or business loans. LLCs are often considered higher-risk than corporations.
- This isn’t a good option for any company with goals of becoming an international business.
- It can be difficult to come up with enough startup funds to keep the business going until it makes a profit.
C-CORPORATION
C-Corporations
A C-Corporation has to follow the IRS guidelines under subchapter C. The C-Corporation is a good choice for a larger business structure. It is considered a separate legal entity. These larger businesses have many shareholders to help them generate funds as they need them. They can compete on a global scale. If the business profits, the shareholders also have the opportunity to profit from their investments.
ADVANTAGES
- This option offers personal liability protection.
- This is a good option for international business endeavors.
- There is no limit on the number of shareholders. This makes it easier to raise additional funds for the business when necessary.
- Often eligible for government incentives and additional tax breaks, although there are specific qualifications that have to be met.
DISADVANTAGES
- A corporation must have a board of directors and shareholders.
- A person may face double taxes with this type of format. They get taxed as both an individual and as a business entity.
- Additional administration requirements to maintain compliance with the required documentation.
- Less flexibility for operation methods.
S-CORPORATION
S-Corporations
An S-Corporation has to follow the IRS guidelines under subchapter S. The S-Corporation is a good choice for small to medium businesses. It is considered a separate legal entity and they rely on shareholders to help them generate revenue. The profits or losses for the business are passed on to shareholders. These investments are risky but are also an opportunity for shareholders to make money when the business is successful.
ADVANTAGES
- There is only one level of taxation. There are additional tax breaks not offered with C-Corporation.
- Highest level of protection for assets.
- Easy to transfer ownership if the business is sold.
- Increased credibility with investors and consumers.
DISADVANTAGES
- A corporation must have a board of directors and shareholders.
- There is a maximum of up to 100 shareholders.
- All shareholders must be citizens of the USA.
- Only one classification of stocks is allowed.
- Not recommended if the plan is to do business internationally.
- Additional administration requirements to stay in compliance with the required documentation.
- Less flexibility for operation methods.
EVALUATE YOUR NEEDS
Spend some time evaluating the needs of your business. This will help you identify the best formation to proceed with. As you compare what each option offers, you will find the best fit. It can be useful to talk to a tax professional before you make a final decision.
Looking for further help on this topic? Reach out today and we can get you connected with our business partners. 949-377-0005.
