So you’ve been struck by the business muse and put your idea into motion. Rewards come by money considerable enough to parlay this idea into an actual, functioning entity. Excitement runs abound, but your knowledge regarding commerce is considerably cloudy. Annd… you’d be surprised just how often the everyday adult gives back into his and her weary, daily grind in lieu of a workable entrepreneurial plan simply due to the lack of corporate by-law wisdom. When resources are abundant, I find that a tremendous shame. While we’re not expected to be a living business Laywer, Banker, Salesman, and Consultant all balled into one, we can certainly begin research with one simple question:
Should I form a Corporation or an LLC? It's a common question among business owners and one that deserves careful consideration. While both are excellent choices for personal liability protection, each structure offers its own set of distinct advantages. Choosing the right one for your company depends on your particular business, operational needs, and tax strategy.
THE ADVANTAGES OF FORMING A CORPORATION:
1. Wider Recognition
The American Corporation has been around as long as entrepreneurialism itself. It enjoys wide recognition and acceptance as a legal entity everywhere in the United States. In contrast, the LLC is a relatively new entity, and although recognized as a legitimate business structure, it still experiences occasional business restrictions in a handful of states. Therefore, should you choose this option for your own business entity, make certain you educate yourself upon the relevant laws applicable to the area in which you will be operating.
2. No Self-Employment Taxes
For many entrepreneurs, one of the most attractive features of the Corporation is the ability to only pay self-employment taxes on salary exclusively, and not on profits. For example, if your corporation earns a total of $60,000 but you pay yourself a salary of $40,000, the remaining $20,000 profit would not be subject to self-employment taxes. This alone saves you over $3,000 per year. LLCs on the other hand are required to pay self-employment taxes on all taxable company income—including salary and profits.
3. Greater Tax Planning Flexibility
Unlike LLCs, traditional C-corporations allow you flexibility to shift corporate income, minimizing your overall tax burden. You have the option, for example, to deduct your own salary as an expense to lower your corporation's total taxable income. You also have the flexibility to decide whether you want to retain any corporate profits for future expenses or to distribute them to shareholders as dividends.
4. Greater Variety of Fringe Benefits
Corporations enjoy a wide variety of fringe benefit plans such as retirement plans, employee stock purchase plans, medical plans and medical reimbursement plans for costs not covered by insurance. While LLCs are also allowed fringe benefits, fewer options exist from which to choose.
THE ADVANTAGES OF FORMING AN LLC:
1. Minimal Corporate Formalities
LLCs are similar in structure to general partnerships but come with an added benefit of personal liability protection for members. Due to their relative simplicity, LLCs are easily maintained, and require fewer state-mandated formalities than corporations. Whereas Corporations must hold regular Board of Directors and shareholders meetings, keep written corporate minutes, and file annual reports with the state, members of an LLC are not required to hold any such formalities. Furthermore, in many states, LLCs are not even required to file an annual report whatsoever.
2. No Double Taxation
By default, an LLC is treated as a "pass-through" entity, meaning all of the LLC's profits are passed directly to its members who pay taxes only once at their individual tax rates. By contrast, a traditional C-corporation pays taxes twice—first on its corporate income, and then again when shareholders pay taxes on their dividends. To avoid this "double taxation" bind, many people choose to either set up their company as an LLC or elect to have their corporation treated as a pass-through entity. Corporations set up as pass-through entities are known as S-Corporations.
3. Operating Expense Deductions
Another benefit of forming an LLC is the ability to deduct your operating expenses directly against your income, as both company profits and losses are passed straight to the members of an LLC. This makes for fairly simple accounting come tax time. With a C-corporation, operating expenses are only deducted against corporate income, not shareholder profits.
4. No Unemployment Taxes
One final tax advantage of forming an LLC is that as a member-employee, you are not required to pay unemployment insurance taxes on your salary. Corporations on the other hand are required to pay this tax. Currently, the federal unemployment tax is 6.2% of the first $7,000 of wages paid, to a maximum of $434 per employee.
5. No Ownership Restrictions
Unlike corporations, LLCs place no limits on the number of members you can have. With an S-corporation, you are limited to 75 stockholders and each stockholder must generally be an individual who is either a resident or citizen of the United States. With an LLC, you may easily place your ownership interest into a living trust. Placing shares of an S-corporation into a trust instrument is much more restrictive.
When first crafting your personal business model during the encroaching tax season, local entity
Albuquerque Business Law, P.C. suggests the following actions upon the completion of your overall business plan:
“Obtain the necessary tax documents and permits. All businesses must obtain a tax registration certificate (sometimes called a “business license”) by registering with their local city or county tax collector’s office. You may need other permits, such as:
federal and state employer identification numbers (unless you’re a sole proprietorship with no employees)
a seller’s permit (if you are going to sell products), which allows you to collect sales tax and also obligates you to periodically remit those taxes to the state, and
a specialized permit or license (depending on what type of business you’re in), such as zoning or environmental or vocational.
Evaluate liability and purchase insurance. Before opening your doors, evaluate your liability exposure and determine your insurance needs.
Establish a bookkeeping system. Set up a reliable and easy-to-use system for tracking your business’s money. Establishing good bookkeeping habits from the start will make running your business infinitely easier; don’t let receipts pile up.”