LLC vs Corporation
Advantages and Disadvantages: Why Most Business Owners Choose an LLC
Building a new business? You’ll need to ask yourself a few important questions up front. Key among them: what kind of company do you want (and need)? The two most popular options are the Limited Liability Company (LLC) or Corporation.
We’ll try to explain some of the key differences.
What Is an LLC?
An LLC is a form of private business ownership that exists exclusively in the United States. It combines the pass-through taxation benefits of a partnership or sole proprietorship with the liability protection of a traditional corporation.
In other words, an LLC is a “best of both worlds” approach to business ownership — especially for small businesses. Even if you are the only owner of your business, setting it up as an LLC will allow you to significantly shield yourself from many lawsuits and the other liabilities you might face as a sole proprietor. It also allows you to enjoy many of the tax benefits that a corporation would… but without all the rigorous formalities of a corporation.
LLCs are also faster to set up, easier to manage, and generally cost less in terms of oversight, annual fees, accounting, etc. Simply put, the LLC is the least complex business structure in the United States.
What Is a Corporation?
A Corporation is one of the most formal form of business in the United States. It is designed with very large for-profit corporations in mind.
Generally speaking, when you think of a Corporation, you’re thinking about some of the biggest companies in the country. These companies are typically owned by numerous stockholders and investors and are governed by a board of directors and a CEO.
LLCs are far more common and popular than Corporations, and for good reason. The basic advantages of an LLC include:
Taxation. Get pass-through income to avoid many corporate taxes and gain the ability to report business profits / losses on your personal tax return. Those returns are also easier to fill out, whereas a Corporations’s are complicated.
Flexibility. Bringing in a new partner, manager, co-owner, etc.? With an LLC, it’s much simpler (and less expensive) to make changes in your LLC’s management or ownership. Corporations are comparatively rigid.
Allocation changes. Generally speaking, profits and losses are allocated to owners according to their percentage of the ownership interest. But with an LLC, you can arrange to allocate profits and losses in a way that doesn’t correspond to ownership percentages (pursuant to certain guidelines).
Lighter paperwork requirement. With an LLC, you can avoid holding annual meetings. You also won’t need to record minutes for every meeting. The less formal bookkeeping requirements save you both time and money.
Cheaper. With an LLC, you’ll spend far less on annual local, state, and federal filing fees each year. You’ll also be less likely to need an accountant or lawyer (or, if you do, their fees for LLCs are usually much less).
Easier. Save money on your accounting fees each tax season
Faster. Corporations take time to set up, whereas LLCs can get off the ground relatively quickly.
The Disadvantages of an LLC vs. Corporation
The most significant disadvantage of an LLC is simply that you can’t sell shares on the stock market. Of course, the majority of the businesses in this country are not publicly traded, so it makes sense that the LLC is the more popular choice.
(Dreaming big? Don’t worry. If your LLC becomes an overnight sensation and stockholders want in on the action, you can always convert later.)