Choosing Between LLC and Corporation: Which One is Right for You?

If you are unsure which one to choose, the answer is almost always the same: Inc. vs Ltd. vs LLC doesn’t matter. Let the lawyers deal with the details. What matters is your reputation and the principles by which you run your company. Maintain a good reputation founded upon high principles and you will get where you want to go.

The Protection Against Liability

Both types of entities have the significant legal advantage of helping to protect assets from creditors and providing an extra layer of protection against legal liability. In general, the creation and management of an LLC are much easier and more flexible than that of a corporation.

Advantages of Incorporating a Small Business

The advantages of incorporating a small business include: Limited liability for business debts and obligations, no corporate formalities, and pass-through taxation. In a properly structured and managed corporation or LLC, owners should have limited liability for business debts and obligations. However, corporations generally have more corporate formalities than an LLC that must be observed to obtain personal asset protection.

I Recommend Forming an LLC

Id rather recommend you to form an LLC. LLC combines the limited liability protection of a corporation—with the flexibility and pass-through taxation of a partnership/sole proprietorship. Like the shareholders of a corporation, the owners/members of an LLC are not personally responsible for the debts or liabilities of the LLC. The LLC has no limitations on who may be involved and it can be managed by its members or by managers. It is often more flexible than a corporation and it is well-suited for companies with a single owner.

LLC Advantages

Limit Liability: owners of the business are not personally responsible for the business's debts No Limits on Members: No limits on the number of members an LLC can have Flexibility in Tax Designation: An LLC can be taxed as a disregarded entity/partnership (default) or as an S Corp or C corp (requires filing additional election documents with IRS and some states) No Double Taxation: No double taxation when elected to be taxed as a disregarded entity/partnership or S Corp

Disadvantages of LLC

In some states, e.g., New York and Illinois, forming and/or renewing an LLC can be more expensive than forming a corporation. If your business is looking for major investment, your investors might be reluctant to invest in an LLC.

Quick Comparison: LLC vs. C-Corporation

Taxation Differences

The entities are taxed differently. By default, an LLC is a pass-through tax entity meaning that the income is not taxed at the company level. However, a Multi-Member LLC is still required to complete a separate tax return. The income or loss as shown on this return is passed through the business entity to the individual members and is reported on their individual tax returns. A C-Corporation is a separately taxable entity and pays tax on the income prior to any dividend distributions to shareholders. If and when corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders.

Structural Differences

LLCs are less rigid in their structure than corporations, so you have more flexibility in adapting the LLC to your unique business. The Operating Agreement of an LLC can be structured in a limitless number of ways. A corporation, on the other hand, is a formal entity with officers and directors, at least one of each required. An LLC on the other hand can be member managed and run in a less formal way. For small start-up businesses, less formality means you can focus on making money rather than administrative work.

Conclusion

In conclusion, while both LLC and corporation offer protection and flexibility, the LLC offers a more flexible structure, less formalities, and the ability to pass-through taxes, making it a desirable choice for many small businesses.