If you are ready to take your business aspirations from dreams to reality, then CONGRATULATIONS! Starting a business is a very rewarding venture, but it is also stressful because you must establish your business in the most beneficial form so that you and your dreams are protected legally. Your options range from a simple sole proprietorship to a full-fledged corporation with many possibilities in the middle. Two of the most common business formation options are the limited liability company (LLC) and the corporation. As with every decision you will make regarding your business, it is imperative to know the advantages and disadvantages of both.
What is an LLC?
A limited liability company is a business organization that is a hybrid of a partnership and a corporation. The business and its “members” (the business owners) have protection from liability like that of a corporation while enjoying the tax benefits of being taxed as a sole proprietorship or partnership. Essentially, that means that the members are not personally liable for the debts of the business and you can structure it so that the business profits are only taxable to the individual members and not the business as a whole. Since the income of the business passes through to you and the members, the company avoids double taxation. Additionally, LLCs tend to be more flexible than corporations, and as such, are a good option for companies with a single owner. An LLC does not require the formation of a board of directors, which is advantageous since it allows the members to be solely responsible for the decisions that benefit the company.
While the benefits of an LLC are vast, it is important to note that there are disadvantages, too. Unlike partnerships and sole proprietorships, LLCs must be formally established with specific filings in your state. There are fees and costs that go along with your particular state’s filing requirements. Because of the inherent flexibility in how LLCs can be governed, there is also the possibility of future disagreements regarding who owns what and has what authority if there is no operating agreement drafted and executed by all of the members
What is a Corporation?
It is likely that you are more familiar with corporations solely based on names like Nike, Coca-Cola and Delta Airlines. While these companies are multinational, the initial formation regulations they must adhere to are similar to what your company would follow. As with LLCs, the owners of a corporation are not individually liable for the company’s debts if corporate formalities are followed properly.
However, corporations are heavily regulated and are required to maintain detailed records. The shareholders of corporations have the option of incorporating in a different jurisdiction/state than where the business is centered, usually for tax benefit or liability purposes, but those corporations are still required to register in the states where they operate as a foreign domestic business. The governing document among the owners or shareholders of a corporation is called a shareholder’s agreement and it outlines the rights, responsibilities and ownership. Generally, a corporation is controlled through a board of directors. The board may be made up of the executives of the corporation, as well as unaffiliated third parties who advise and/or dictate the executives’ decision making. Most small businesses, however, do not have a board and instead rely solely on the officers to make all governing decisions.
You should also be aware that there are two different types of corporations: C corps and S corps. C corporations pay taxes on their income, plus its shareholders pay taxes on the income they receive as an owner or employee. On the other hand, an S corporation does not pay taxes. Instead, the shareholders report the company revenue on their personal tax return and pay the applicable taxes accordingly, thereby avoiding double taxation.
While taxes are a big differentiator among the type of entity you choose, you should always consult a tax professional along with your attorney to make the best decision for you.
Let’s Figure It Out Together
There are countless factors to consider when forming a business. The structure of your company will affect how decisions are made, how rights are to be determined, how profits are taxed and more. These decisions play a significant role in the eventual growth of your business. Hopefully this blog gives you a preliminary understanding of business formation options, but The Anderson Firm would love to discuss all your options so that your dream becomes a reality. We specialize and focus on setting companies up for success from day one. Call our firm at 404-521-1111 or email us at hello@theandesonfirm.com to get more information about us or to book a consultation. We look forward to working with you.