Login
Password

Forgot your password?

Corporation versus LLC

By Edited May 12, 2015 0 0

When starting a business it is very important to understand the different options available to you regarding business structure. The differences between corporations versus LLC are many. Both a corporation and an limited liability company have advantages and disadvantages. Consider the long term goals, asset protection and tax implications offered by a corporation versus LLC carefully before making a decision.

Corporation

A Corporation is a legally recognized entity and as such affords its owners great protection. With this protection, however, come many advantages and disadvantages.

Advantages

  • Limited liability for owners – the owners are limited in almost all cases to the amount of capital invested in the corporation. Even if huge debts pile up, anything beyond the corporation's assets can only be collected to the point that all owner capital is used up and no further.
  • Raising capital – whether for expansion or to purchase new equipment or property, the ability to raise capital is very easy with a corporation through the tried and true practice of issuing stock. This sale of equity can generate reliable capital without increasing debt.
  • Transfer of ownership – the ability to transfer ownership is very easy with a corporation. Usually, this is achieved through stock sale or transfer.

Corporation versus Limited Liability Company LLC
Disadvantages

  • Initial set up cost – the initial paperwork called the Articles of Incorporation must be written and submitted to whatever state the entity will be incorporated in. Also, organizational paperwork must be presented with structures and other operational information shown. Generally, a lawyer is hired for this process and that can be costly.This is on of the principle reasons people do not choose a corporation versus LLC.
  • Double taxation – a corporation is a legally taxed entity and then the individual owners are taxed again on their salaries or earnings.
  • Regulations – depending upon how many shareholders, the organization can be forced to report to the Securities and Exchange Commission and be under increased scrutiny for audits and compliance issues.

Limited Liability Company

A limited liability company gives many of the same protections of corporations but with a different set of advantages and disadvantages.

Advantages

  • Initial set up cost – it is very easy to file paperwork to become an LLC. Generally, a lawyer is not needed and the amount of paperwork is minimal.
  • Pass through taxation – an LLC is not taxed as a separate entity, so only an informational tax form is submitted. Any income paid to a member or partner by salary or profit sharing is taxed on that person's individual tax return at their personal tax bracket.
  • Less restrictions – generally, there is far less compliance and reporting headaches to worry about than with a corporation since the public is not involved as owners.

Disadvantages

  • Liability protection can be challenged – normally the owners' personal assets are protected, but if an LLC does not hold regular meetings and behave as a proper business than the liability afforded by an LLC can be challenged by a creditor.
  • Transfer of ownership – this is not easy and in some cases will require the dissolution of the LLC and the formation of a new one.
  • Raising capital – since stock cannot be issued, it is in the hands of the owners to raise any necessary capital. Sometimes, personal assets must be pledged as collateral especially for a young business with limited assets.

So, the advantages and disadvantages of a corporation versus LLC are many. Talking to other business owners and seeing what structure they use can be helpful. A potential new business owner should ask them questions about the things they wish they had done differently. This may help you decide which is better between the structures of a corporation versus LLC.

Advertisement
Advertisement

Comments

Add a new comment - No HTML
You must be logged in and verified to post a comment. Please log in or sign up to comment.

Explore InfoBarrel

Auto Business & Money Entertainment Environment Health History Home & Garden InfoBarrel University Lifestyle Sports Technology Travel & Places
© Copyright 2008 - 2016 by Hinzie Media Inc. Terms of Service Privacy Policy XML Sitemap

Follow IB Business & Money