11 May The Choice: LLC vs. Inc.
The choice between a Limited Liability Corporation (LLC) or Corporation is not a generic one. You cannot say with certainty that one is better than the other. But there is an entity that is better for the kind of business that you have. Both have distinct advantages, and it all depends on how better fitting these advantages are to the business.
Unlike sole proprietorship or partnership, the LLC or corporation makes a separate personality for the company. This means that the company becomes separate from the owner. That is why in a corporation, the business is taxed separately. The owners or incorporators, too, are taxed as individual citizens. So it’s like they are hit with double taxation. This is why a lot of starting companies choose to do the LLC, because tax-wise, it just sounds better. In the case of the LLC, while the company is treated as a separate entity, the tax is passed through the owner or owners—much like a sole proprietorship or partnership. However, there is no personal liability in case of debt or legal issues.
Even if it seems like having a corporation means being taxed twice, the overall tax an owner pays may actually be lower than if he registered the company as an LLC. Corporate income splitting can potentially lower the overall tax obligation. In terms of raising money, the corporation is also attractive because it can dangle shares in the company to attract investors.
The LLC is also attractive in the sense that owners don’t need to hold an annual stockholders meeting or submit minute book requirements unlike corporations. There is also no limit on the number of owners in the LLC. The downside is that there is no such thing as corporate income splitting, which effectively lowers tax rate, when it comes to the LLC. It also cannot issue stock or stocks.
For most startups, LLC is the easiest route. The process is generally simpler and with less paperwork. However, it is dependent on the state you are opening the business in. States have different pre-requisites when it comes to forming LLC. But these are still generally simpler compared to forming a corporation. Some states even allow the online applications, which make it easier and more convenient for the owners. However, there are also some states that require the additional filing of a public notice. And because the LLC is dependent on the state the company is registered or is operating, there might be some issues on expansion. If the company plans to open another branch in another state, which has a different set of rules or procedures in starting a business, you might have to do additional work. Aside from that, there is also a possibility that the businesses will be treated differently—in the long run—depending on which state the branch is.
Corporations are really advantageous for bigger companies. It has more flexibility when it comes to the company’s excess profits. In the case of S-corporations, dividends, which are distributed to the owners or incorporators, carry a much lower tax rate compared to gross income. As for the C-corporation, dividends can stay with the company until managers identify how to take advantage of the best tax scenario.