Advice flows like a river when it comes to owning a business. You might hear, “Do not form a Limited Liability Company (LLC)” or “forming a corporation is much too complicated for a small business owner.” What is the answer to the question, “Should you form an LLC or a corporation?” We recommend forming a Wyoming LLC.
Both an LLC and a Corporation enjoy limited liability, which is the legal principle that minimizes the exposure owners and shareholders face in terms of lawsuits. Both types of businesses must keep company operations separate from the owners’ activities to sustain limited liability protection. If a civil court judge discovers the activity of the owners is not separate from the business, then both the owners and shareholders lose their limited liability status.
Limited liability is the most prominent similarity between an LLC and a corporation, but there are other differences that should convince you to form an LLC in Wyoming.
LLCs Enjoy Tax Advantages
Corporations pay an income tax that is often higher than the rate established for individuals. LLCs operate under a different taxation model. All company earnings pass through the corporate tax rate to be taxed at each LLC member’s individual tax rate. Not only does this LLC taxation model eliminate costly corporate taxes, but it also spreads the tax burden among the members of an LLC.
LLC owners and other small business owners may also qualify for the Qualified Business Income (CBI) deduction, which allows LLC owners to claim a 20% deduction from their business net income, in addition to the normal business expense deductions. This deduction is not available to corporate shareholders.
Business Formation Differences
Businesses must register the type of business formed with the state where they do business. Forming an LLC involves the members filing an Articles of Organization with the primary state where the LLC conducts business. All members sign a contract that is referred to as an Operation Agreement that is used to manage the daily activities of the LLC. The Operation Agreement also defines each member’s stake in the newly formed LLC.
For the formation of a corporation, Articles of Incorporation must be filed with the Secretary of State in the state where the corporation intends to establish a headquarters. The Articles of incorporation lists the board of directors that is responsible for managing corporate business activities, as well as creates the bylaws that the corporation must follow when in operation.
Different Type of Business Ownership
Both LLCs and corporations operate with owners calling the shots. However, the type of ownership is dramatically different between the two business entities. LLC members each get an equity interest in the assets used by the business that is determined by the amount of investment made by each member. Corporation owners are the shareholders that purchase shares of stock in the business.
The Handling of Profits and Losses
The profit and loss statements issued by LLCs and corporations can look similar, but how the profits and losses are determined differ substantially. LLCs operate on the pass-through profits and losses model, which means all earnings pass through the company P&L statement to land in the ledger of each member’s bank account. Corporate profits and losses appear on the business accounting ledger, which means shareholders are not legally liable for assuming financial responsibility for how the business performs.
Forming an LLC
If you still cannot decide whether to form an LLC or a corporation, the Cloud Peak Law Group can help you make the right decision. We can explain the benefits of forming each type of business and, at the end of the day, you should be convinced that forming an LLC in a state such as Wyoming makes excellent financial sense. Contact us today!