Okay, so you’ve got a business. What next? What kind of entity should it be? There are pros and cons for LLC vs. corporation which we’ll discuss here, but the bottom line is you want to separate yourself from your business. Tax purposes play a role but you don’t want someone suing you personally if it comes to legal action. Protect your personal assets by the type of business entity you choose.
When you incorporate your business becomes its own entity–a legal one, and it’s separate from its owners, unlike a sole proprietorship. A limited liability company or LLC falls under this category and so does a corporation. You may have heard of C-corps and S-corps. They’re two such types.
Each keeps you safe from personal liability (hence the name “limited liability” in the LLC). There’s also an element of professionalism in having that LLC or Inc. after the business name.
LLC vs. corporation:
Of course there are differences between the different entities, but which is best for you?
LLCs keep you, the owner, protected should you be sued. Your personal assets are separate from those of the company so you can’t be held personally liable. There’s also more flexibility in how you can operate an LLC. Unlike a corporation you don’t have the rigid management structure. It’s also a pass-through entity, meaning you don’t pay taxes at the business level, but rather on your personal return.
Looking at S and C type corporations, the S-corp is most similar to an LLC being a pass-through entity. C corps, however, are different and are not pass-through. Owners who earn dividends or get distributions of some kind may be taxed on those in addition to the tax paid by the corporation itself at the first level. It’s sometimes referred to as double taxation.
LLC vs. corporation: some comparisons
C-Corps and LLCs can have unlimited numbers of owners while S-corps may have a maximum of 100.
S-Corps allow owners to deduct business losses on their personal returns.
C-corps, unlike S-corps allow owners to hold different stocks making it possible to receive different dividend levels and that can hold onto earnings from one annual period to the next.
S-corps can help with savings on some taxes such as Medicare or self-employment. They also provide the ability to use business losses to offset income that didn’t come from the business.
There’s a plethora of information on the web, but really your accountant will be able to explain the benefits and downsides of each entity. The bottom line is that you incorporate in some way so as to protect your personal assets should you find yourself facing any sort of legal action. And of course there are online incorporation websites like LegalZoom that can make incorporation easier than in the past.
You will want to engage the services of a good accountant so make that one of your first tasks in addition to choosing the type of business entity that’s right for you.