LLC vs. Corporation: Best Entity Formations For Small Businesses

Two of the most popular entity formations for small businesses are LLCs and corporations.

Both entities provide startup owners with assets. One of the biggest benefits is limited liability protection. This creates a separation between the assets of the business and the owner. It protects the owner’s personal assets in the event of an unforeseen circumstance.

What are some good reasons to choose an LLC or a corporation to incorporate a business? Here’s how LLCs and corporations differ from each other. Plus, find out which entity formations for small businesses are best and why.

Ownership

Ownership structure looks a bit different in an LLC. The same may be said for a corporation. It’s important to know how each entity structures ownership. Then, you can pick the best entity for your business.

LLC Ownership

Let’s start with LLC ownership. An LLC may distribute its ownership stake to its members. These members are also known as the LLC’s owners.

However, what happens if one member does not invest as much in the LLC as another member? Situations like these require referring to the LLC’s written operating agreement. This agreement includes terms. These terms specify all members receive an equal share of the profits. The LLC operating agreement may include details about the process for transferring membership interest between members. Creating this written agreement allows the LLC to establish flexibility in its business ownership.

Corporation Ownership

A corporation, on the other hand, can issue shares of stock. It may sell percentages of the business to its owners. These individuals are shareholders.

Once shareholders are issued shares, they may transfer these shares. They may also buy more stock to own a larger percentage of the company or sell their stock. Corporations exist in perpetuity. If an owner should leave or divest from the company, the corporation would remain in existence. This is because it is separate from its owners.

Management

The management structures between an LLC and corporation differ greatly from one another. One entity is flexible. The other is a bit strict. It depends on the type of business you run. You may choose an entity simply because of its management structure.

LLCs are flexible entity formations. Manage the LLC using one of three methods with its members.

• Single member LLC. A single member runs the LLC. This member runs the business.
• Member managed LLC. An LLC with multiple members allows each member to manage the entity. This management is equal. All members share the same amount of responsibility.
• Manager managed LLC. This option allows a board of managers to oversee the direction and operation of the LLC. It’s usually a good management structure option for members who are not comfortable running an LLC on their own.

Corporations, however, tend to be formal in their management style. A corporation requires a formal structure to run the business. This includes a board of directors to handle management responsibilities of generating profits for shareholders and corporate officers who work on the organization’s daily operations.

Even shareholders are owners of the corporation. However, with the exception of approval in major corporate decisions, they are often separate from business decisions and the corporation’s daily operations.

Taxes

Taxes are one of the greatest differences between an LLC and corporation.

Let’s begin with a look at LLC taxes. As such, LLCs are taxed as a pass-through entity. Business profits “pass-through” to members. You report profits and losses on individual tax returns. This does not happen at the business level. Members may also deduct losses or operating costs of the business on their personal tax returns. This helps offset other income. It makes the process of tax filing a bit easier.

Since a corporation earns its own income, it is taxed as a separate entity. Corporations have a responsibility to pay tax on their profits and tax on dividends distributed to shareholders. Dividends are taxed twice. This is a process known as double taxation. This includes salaries and bonuses. It is not tax deductible.

One of the most popular options for corporations trying to avoid double taxation is an S Corporation election. Qualifying corporations with less than 100 shareholders may elect to file as an S Corp. This gives corporations the chance to be a pass-through entity. They may save on taxes.

Should I Incorporate as an LLC or Corporation?

You understand what it’s like to own, manage, and taxation as an LLC and corporation. Which are the best entity formations for small businesses? Ultimately, the decision depends on the type of business you plan to own and operate.

Although we cannot provide legal guidance, the best advice is to consult a legal professional or an accountant. They may be able to answer any additional questions you have. These professionals may guide you toward the entity formation best for incorporating a business.  

In summary, we are ready to assist you in incorporating your small business! Let the team of professionals at MyCorporation guide you step by step through the incorporation process. Reach out to us at mycorporation.com to start incorporating your business today.