What is the Difference Between an LLC and a Corporation?

Your business is growing, or you’re starting a new business, and it’s time to incorporate. Like many entrepreneurs, you might not be sure where to start.

What’s your first step? Which business type do you choose? The best way to beat the overwhelm is by gaining information, of course.

In this post, we’re going to compare an LLC and a Corporation and help you decide which business type is right for you.

What Does It Mean to Incorporate Your Business?

Before you incorporate your business, you’re operating as a sole proprietorship or a general partnership. The drawback, however, is that these business entities provide very limited legal protections.

When you incorporate your company, though, the business becomes formally recognized by its state of incorporation. The company, therefore, transitions into a legal business entity that is technically separate from the individuals behind it.

Typically, these business entities take one of two forms: an LLC or a corporation. The right choice for you depends on the nature of your business, and your goals for its growth.

Here’s what you need to know about each.

What is an LLC?

LLC stands for “Limited Liability Company.” LLCs are designed to protect business owners, who have the title of “members.” The most significant benefit of an LLC is that the entity offers a layer of legal protection and can help insulate members from lawsuits.

By protecting your personal assets, an LLC offers peace of mind and a solid foundation for business growth. LLCs also allow you to take advantage of pass-through taxation and flexible management structures.

What is a Corporation?

A corporation is a different, more rigid business entity than an LLC. While there are several functional differences between the two formations, the most notable difference is taxation.

There are two different types of corporations: S corporations and C corporations. S corps are legal “pass-through” entities, like LLCs. This means that you won’t be subjected to business-level taxes with an LLC or an S Corp.

This is different in the case of a C Corp, though, which is taxed as a separate entity and will be subject to “double taxation” if shareholders collect dividends.

For some businesses, corporations may also present a series of financial benefits. For example, an S Corp allows business owners to deduct business losses from their personal tax returns and can create savings on self-employment taxes.

Both LLCs and C corps impose some limits on the number of owners behind a business, but S corps are more specific in that they can’t have more than 100 owners, and none of those owners can be “non-resident aliens.” S corps also can’t be owned by LLCs, non-qualified trusts or C corporations.

Which is Best for You?

There is no “one-size-fits-all” rule for deciding which entity is right for you. If you’re looking to incorporate your business, the best thing you can do is consider your short- and long-term goals, and compare the entities to determine which will suit your needs best.

After all, starting a business is difficult, and working with a professional is one of the best ways to ensure it goes as smoothly as possible from start to finish.

If you still have questions, you can benefit from speaking with an attorney who specializes in incorporating businesses. You can schedule a consultation below.

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