As a business owner, it is sometimes difficult to decide how you should structure your business to make it as efficient as possible, but also as profitable as possible. This post explains some of the main differences between a Limited Liability Company (LLC) and a Corporation, as well as, why an LLC may be the right business structure for you.
Personal Asset Protection
To answer the question above––no, an LLC is not a corporation. However, like a corporation, an LLC has the distinction of being one of the most popular business structures.
There are many reasons why a business owner may want to operate as either an LLC or corporation. The most popular reason, however, is asset protection.
If your business is a sole proprietorship or general partnership and if someone brings a legal action or obtains a judgment against your business, your personal assets may be attached to satisfy the debt. In the worst case, this could mean losing all of your personal property to the lawsuit or judgment.
But, by structuring your business as an LLC or corporation, you will have effectively created a wall between your business affairs and your personal assets. As such, your business will be regarded as a separate entity and your personal assets will be beyond the reach of your business creditors.
LLCs vs. Corporations
Although most business owners are familiar with the terms "limited liability company" and "corporation", many are unclear as to the differences between the two. Many business owners are even under the impression that an LLC is merely a certain type of corporation. However, this is not so.
Even though corporations and LLCs offer some of the same benefits, they are two very different types of business structures. Here are some of the main similarities and differences between LLCs and corporations:
How Corporations and LLCs Are Similar
Both corporations and LLCs are great ways to keep your personal assets and business affairs separate. Both LLCs and corporations furnish their owners with limited personal liability for the debts, obligations, and liabilities of their business. In contrast, the owners of sole proprietorships and general partnerships can be held fully liable for debts, obligations, and liabilities arising out of their business operation.
How Corporations And LLCs Differ
Business Requirements - corporations are required to have a board of directors and shareholders and to hold annual meetings. An LLC, however, doesn’t have to meet these requirements. LLCs allow businesses to enjoy many of the benefits of a corporate business structure without any of the corporate formalities, making it extremely advantageous for many small businesses.
Taxes - corporations are taxed twice - once at the corporate level, and then again at the personal level, when the income is distributed to the corporation's shareholders as dividends. This is referred to as "double taxation".
Conversely, LLCs do not pay taxes on their income. Instead, the LLC's income passes through to its members, where it is reported on their individual tax returns (much the same way that income is reported for sole proprietorships and partnerships), consequently, there is no double taxation with an LLC.
Why Choose an LLC?
An LLC is a great alternative to a corporate business structure because it combines the corporate advantage of limited liability with the pass-through taxation of a sole proprietorship or partnership. This is why, nationwide, LLCs are the most widely used business structures for small businesses.
But, besides the personal liability protection and tax advantages provided by structuring your business as an LLC, there are also a number of other advantages:
- No residency requirement - LLC ownership is not restricted to United States citizens and permanent residents.
- Growth Potential - there are no restrictions on the number of owners an LLC can have.
- Credibility - LLCs are more attractive to potential investors, members, lenders, and suppliers than sole proprietorships and partnerships.
In short, if you desire limited liability protection, the pass-through tax advantage of a sole proprietorship or partnership, and more credibility in the eyes of potential investors, members, etc., then you should seriously consider forming an LLC.
Need Assistance? Get in touch with an experienced Business Law Attorney
When choosing a business structure, you must evaluate the advantages and disadvantages of each structure and choose the one that suits your business the best. This will frequently require the guidance and advice of a skilled business law attorney.
An experienced business law attorney can help you understand the pros and cons of each business structure and assist you in determining which structure is best for your business. To learn more, or for help forming an LLC, call us today.