Last Updated on April 3, 2023
One of the crucial decisions you will face when starting a new business is choosing which structure of entity to go with. In addition, for a first-timer who is unaware of what the various entities are, it would be difficult to make the best decision.
Fortunately, there are many sources available to guide you to learn the basic essentials about these entities, and services like ZenBusiness to help you in forming one. This will also enable you to identify which structure best suits your upcoming business.
Difference and Benefits: LLC vs. Corporation
Two of the most commonly used entities are the LLC and Corporation. Both have benefits when it comes to business start-ups. Consequently, they also vary in many ways which is why you need to study basics to choose the best option for your business.
LLC vs. Corporation: Ownership
One of the major considerations you need to look into when deciding between an LLC and a corporation. These two business structures have very different forms of ownership. For a corporation, it has the ability to issue or sell shares of the business to the owners which can be a big advantage if you are trying to attract investors.
On the other hand, LLCs can distribute ownership to their members regardless of their financial contribution to the business. This is the advantage of an LLC which promotes flexibility when assigning ownership to members.
LLC vs. Corporation: Taxation
When it comes to taxation, corporations are viewed and taxed as a separate legal entity. This entity is designed to pay for their profits and the dividends which are referred to as double taxation. For others, this might seem like a disadvantage but it also offsets federal deductions that are only available to corporations.
Meanwhile, LLCs can choose how the business is to be taxed. As a single-member entity or if it has one member, the income earned flows through it and can report it as income on their tax return. For a multiple-member LLC, it is taxed as a partnership.
LLC vs. Corporation: Management
Corporations have strict management that requires a formal structure with a Board of Directors which handles management-level responsibilities of generating profits. Meanwhile, handling daily business operations are the corporate officers.
As for the LLC, this has a more flexible structure of management. Management of LLCs can be done by a group of members or any member within the entity. This makes it less formal and more ideal for some start-up business owners.
LLC vs. Corporation: Formal Requirements
Formal requirements set by the state need to be fulfilled by both corporations and LLCs. However, some requirements are specific to each of them. A corporation needs to organize a shareholder’s meeting annually. In addition, they need to file an annual report and any changes within the business need to be voted on at a board of directors meeting.
Meanwhile, an LLC has fewer formal requirements. Since they have a less formal management structure, they are not required to record minutes of meetings, have annual meetings, or create a board of directors.
If you’re looking for more freedom as a business owner, then an LLC might suit you best. But if you’re the type of business owner who wants to run his business in a more strict and organized manner, you should go with setting up a corporation. Whatever the business entity you’d later decide on, still, the most important thing is how you run your business. Make sure to continuously improve your business skills to be updated in the current business trends.