Many companies have a hard time figuring out which is right for them, incorporating their business or creating an LLC (Limited Liability Company). In many cases, businesses do not even know the differences between the two. This is a big decision as it has the ability to make or break a business when it comes to taxes and legal matters. If you choose the wrong one, it could have a negative impact on your business both financially and legally. Keep reading to discover some of the differences between the two and which one is the right one for your business.
LLCs
There are many benefits to choosing to form an LLC. It has the ability to provide your business with liability protection, much like corporations. This means that any debtors will not come after your personal assets, simply your business ones. This is what makes this the better option of sole proprietorships and partnerships. You will not experience double-taxation as you can choose how you want to be taxed on your tax return. There is much less paperwork needed to run an LLC as opposed to running a corporation.
It is important to remember that an LLC is not a corporation and can only provide limited liability to certain jurisdictions. If you are forming an LLC you will not need to be organized for profit. If you provide medical or legal services you most likely will not be permitted to form an LLC. Instead you might be asked to form an entity that is similar to an LLC called a PLLC. (Professional Limited Liability Company) An LLC has some qualities that can be seen in organizations and sole proprietorships but also have their own unique qualities as well.
There are also some disadvantages to filing for an LLC. Tax liability is going to differ from state to state with an LLC. If you plan on running your business in several states, you must understand how each state handles and treats LLC before filing. Another downside to filing for an LLC is that you cannot at any time go public. So if your plan is to go public, an incorporation is the safer route to take.
Incorporation
If you are a newly formed business, you will probably form an S corporation as opposed to a C corporation, due to its numerous benefits. One of the biggest perks to forming an LLC is that you can go public. Companies prefer to work with corporations over LLCs for that very reason. S incorporations are also able to have stock plans to add incentive. If you are a C corporation, you may in fact face the risk of double-taxation.
If you have an incorporation your assets are protected against any company liability. If you are looking to transfer your company to another entity or party, it will be much easier if you are incorporated as opposed to being an LLC. You also are rewarded with a lower rate of tax than on your own personal income. Another perk to forming a corporation is that you are also able to sell your stock and raise capital for your business. However, the tax restrictions are stricter when it comes to loss carry forwards.
The only real downside to choosing to incorporate your business is when you choose to incorporate as a C corporation. This puts you at a higher risk for double-taxation which is why many businesses are choosing to go take the S corporation high road. Aside from the excessive paperwork you will be swallowed in with a corporation, this is the better option for your company if you plan on going public and practicing your business in multiple states.
The best possible thing to do when faced with this decision is to contact an attorney. A professional attorney will have the ability to explain the differences to you in depth and give you the pros and cons to each individual option. Understanding the difference between the two will certainly help you in the process. Every company is different, so it is important to factor in all of those differences before making a decision on whether to incorporate your business of file for an LLC.
