If you are starting a new business and weighing the benefits of filing as a limited liability company (LLC) versus a corporation, you’ll want to consider a number of things, as both offer advantages and disadvantages. First, how much control do you want over your expenses, investments and ownership? Second, how big do you want to grow? Do you envision seeking investments from others or doing business overseas? Consider these questions, and read on for a quick rundown of the two competing statuses.
How They Are Similar
Both of these statuses protect the personal assets of the owner or owners from business taxation and liability, and consider business and personal finances as separate entities. These are important because it means an individual’s house and other assets are shielded from taxation, or even liquidation, should the business fail. In addition, filing as a corporation or LLC is permissible in all 50 of the United States and the District of Columbia.
How They Differ
Corporate status is usually desired by larger businesses who will want to seek capital from outside sources and have some flexibility in offering stock options to their employees. In addition, filing and getting an EIN for a corporation makes it easier to do business outside of the U.S. Filing and getting an EIN for an LLC, on the other hand, does not offer those protections and benefits. Instead, this type of status is good if the owner of the LLC wants to have a great deal of flexibility in setting up its ownership structure. In addition, it offers fewer restrictions on how taxes can be filed and even paid, in some cases.
As a new business owner or entrepreneur working for yourself, you will want to contemplate both the benefits and the drawbacks of an LLC vs. a corporation. While they have their differences, choosing the one that is ideal for your organization is crucial.
LLC Benefits and Drawbacks
LLCs are not thought to be unique and separate entities by the Internal Revenue Service department (IRS) for tax related purposes. Instead, you will decide how you want to be taxed, including as a single member LLC, partners in an LLC, and an LLC filing as a corporation. This gives you a lot more tax filing flexibility.
Another benefit of having an LLC is that compared to S-Corps or C-Corps, having an LLC is extremely flexible as you can govern the rules of your company because there are a lot less stringent requirements set forth by the IRS. If you loathe filing paperwork, then an LLC might be best for you.
An LLC also provides you with protection from liability. If your company ever goes into debt or gets sued, your personal assets will be protected.
Some of the drawbacks of an LLC include confusion about roles and a limited life span. Corporations have specific roles whereas LLCs do not, so sometimes employees will not know where they stand.
Corporation Benefits and Drawbacks
There are many perks to filing your business as a corporation. Your business can deduct cost of benefits it provides it workers, a corporation protects you and your shareholders from debts or judgments incurred by the organization, and you can get additional funds by selling shares of your company.
The disadvantages of a corporation include lots of time and money involved in starting one versus other company structures, and governmental agencies can and will monitor your company, resulting in additional paperwork, possibly subjecting you to higher overall taxes.
You can apply for an EIN online; before doing so, however, it is always a good idea to consult an experienced tax attorney who can help make your decision as to which type of entity is best for your business.