Connect with us

Business

LLC vs. Incorporation: Which Should I Choose?

Published

on

LLC vs. Incorporation: Which Should I Choose?

The decision to form either a limited liability company (LLC) or a corporation depends on the type of business that an individual is creating, the possible tax consequences of forming the entity, and other considerations. Both types of entities have the significant legal advantage of helping to protect assets from creditors and providing an extra layer of protection against legal liability.

In general, the creation and management of an LLC are much easier and more flexible than that of a corporation. Still, there are advantages and disadvantages to both types of business structures.

KEY TAKEAWAYS

  • The creation of a limited liability company (LLC) is a much simpler process than creating a corporation and usually requires less paperwork.
  • LLCs are created under state law, so the process of forming one depends on the state where it is being filed. Once an LLC is formed, it is good practice to set out the roles and responsibilities of the members by creating an operating agreement to define these roles.
  • The Internal Revenue Service (IRS) does not view an LLC as a separate vehicle for tax purposes, which allows for greater flexibility. Members can choose how they are taxed. They can be treated as a sole proprietorship, a partnership, or a corporation.1
  • Two types of corporations can be formed: an S corporation and a C corporation. An S corporation is a pass-through entity, like an LLC, where the owners are taxed on profits and losses of the corporation. A C corporation is taxed at the corporate level, separately from its owners, through a corporate income tax.
  • Corporations offer more flexibility when it comes to their excess profits. Whereas all income in an LLC flows through to the members, an S corporation is allowed to pass income and losses to its shareholders.

Ease of Forming an LLC

Creating an LLC is a much simpler process than creating a corporation and generally takes less paperwork. LLCs are under the jurisdiction of state law, so the process of forming an LLC depends on the state where it is being filed. Most states require filing articles of organization with the secretary of state, and some states allow for them to be filled out online. A few states require an additional step of filing a public notice, often in local newspapers. Once these steps are completed, the LLC is officially formed.

Once an LLC is formed, it’s good business practice to set out the roles and responsibilities of the members. The members are individuals with an ownership interest in the LLC. Most LLCs use an operating agreement to define these roles. Drafting an operating agreement is not necessary for an LLC to be valid, but it is a prudent course of action. If no operating agreement is created, then an LLC is governed by the default rules contained in state statutes.

https://677221de3b24f1654b41015a1ad205d1.safeframe.googlesyndication.com/safeframe/1-0-40/html/container.html

The operating agreement sets forth the rights and responsibilities of the members. It can define the business relationship and deal with issues of capital structure, allocation of profits and losses, provisions for the buyout of a member, provisions in case of the death of a member, and other important business considerations.

Tax Flexibility of an LLC

The Internal Revenue Service (IRS) does not view an LLC as a separate vehicle for tax purposes, which allows for greater flexibility. Members can choose how they are taxed. They can be treated as a sole proprietorship, a partnership, or a corporation. The most common tax option of an LLC is taxation similar to a sole proprietorship. A member has to pay taxes themselves on the profits of the LLC as opposed to the LLC paying the taxes. The profits and losses of an LLC are passed through the business to the owner. The owner then has to report the profits or losses on their own personal tax returns. The LLC itself does not pay any corporate tax. This method avoids double taxation, which is a drawback of corporations.1

Disadvantages of an LLC

Although an LLC does come with plenty of advantages, there are some disadvantages to consider. LLC members also have to pay a self-employment tax, which includes a 12.4% tax for Social Security and a 2.9% tax for Medicare.2

There are other drawbacks to an LLC as well. The purpose of an LLC is to protect its members from any liability. If the company fails to meet its obligations, then creditors can target only the LLC, not the assets of the members. However, there are certain situations in which an LLC can be automatically dissolved, leaving members open to risk.

Automatic dissolution can be triggered if an LLC fails to report its filings on time; a death or withdrawal of any member occurs, unless succession provisions are outlined in the operating agreement; a change in the structure of the LLC, such as a merger; and any terms with expiration dates. In these situations, an LLC can continue doing business, but the liability structure of the members may alter, defeating the initial purpose of creating the LLC.

Prior to the passing of the Tax Cuts and Jobs Act in 2017, an LLC treated as a partnership for tax purposes could automatically be terminated due to tax reasons as well. The automatic termination was triggered if there was a transfer of 50% or more of an LLC’s total interest or profits within a 12-month period. This rule no longer applies from tax year 2018 and beyond.3

Another major disadvantage is the differences among states in the statutes that govern LLCs. This can lead to uncertainty for LLCs that operate in multiple states. The differences in rules and regulations can result in additional paperwork and inconsistent treatment across different jurisdictions.

Advantages of a Corporation

Despite the ease of administration of an LLC, there are significant advantages to using a corporate legal structure. Two types of corporations can be formed: an S corporation and a C corporation. An S corporation is a pass-through entity, like an LLC, where the owners are taxed on profits and losses of the corporation.4 A C corporation is taxed at the corporate level, separately from its owners, through a corporate income tax.5 C corporations are the most common type of corporation.

C corporations have the advantage of allowing profits to remain with the corporation and paying them out as dividends to shareholders. Also, for businesses that eventually seek to issue stock, a C corporation can easily issue shares to raise capital for further expansion of the business.

Corporations offer more flexibility when it comes to their excess profits. Whereas all income in an LLC flows through to the members, an S corporation is allowed to pass income and losses to its shareholders, who report taxes on an individual tax return at ordinary levels. As such, an S corporation does not have to pay a corporate tax, thereby saving money, as corporate taxes are higher than ordinary taxes. Shareholders can also receive tax-free dividends if certain regulations are met.

Disadvantages of a Corporation

There are significant disadvantages to creating a corporation regarding the amount of complexity involved. It requires a great deal more paperwork, meeting many more guidelines, electing a board of directors, adopting bylaws, having annual meetings, and creating formal financial statements. They generally have more burdensome record-keeping requirements than LLCs.

There is also the issue of double taxation for corporations. This refers to taxes being paid twice on the same income. This is because corporations are considered separate legal entities from their shareholders. Thus, corporations pay taxes on their earnings, while their shareholders also pay taxes on any dividends that they receive from the corporation.

Am I required to have a limited liability company (LLC) or a corporation to hire employees?

No. You can hire employees or contractors as a sole proprietorship, although you may expose yourself to greater risk. A limited liability company (LLC) or a corporation protects your personal assets by creating a structure for your business separate from your personal finances.6

Which is more expensive to set up: an LLC or a corporation?

Fees for incorporating or creating an LLC vary from state to state. Forming an S corporation can range from $100 to $250 for only the state incorporation fees, not including lawyer fees. An LLC can range from $50 to $500, depending on the state.7

Does an LLC require more than one member?

No. An LLC only limits liability; it doesn’t establish anything about the structure of the business. A single-person business can be an LLC.

The Bottom Line

Though similar in many ways, LLCs and corporations have quite a few distinctions that bring both advantages and disadvantages to each. As an individual starting their own business, it’s important to understand all of the nuances involved and choose the right structure for your company.

SPONSORED

Win Up to $10,000 While Trading Digital Assets

Digital asset trading just got easier. With OKX, a leading digital asset financial service provider, you can access world-class security as you trade and store assets. What’s more, you can win a Mystery Box worth up to $10,000 when you complete a deposit of more than $50 through a crypto purchase or top-up within 30 days of registration. Learn more and sign up to claim your Mystery Box today.

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Business

How to Ensure Customer Retention During an Economic Downturn

Published

on

By

How to Ensure Customer Retention During an Economic Downturn

Are you worried that an economic recession is on the horizon? You can bet every business owner is.

Certainly, the last two years haven’t been easy on the economy. The COVID-19 pandemic took almost every business to the cleaners. The Russia-Ukraine conflict is adding salt to an already wounded economy.

Officially, the economy is not in a recession, but there are signs of a downturn. During economic turmoil, consumers reduce their spending. This directly affects businesses.

To ensure your business stays afloat, it’s important to focus on customer retention. In this article, we’re sharing some of the strategies you can use to retain customers during an economic downturn.

Read on!

Reach Out to Your Customers

The first practical step is to establish communication with your customers about the economic situation.

Let them know that you’re worried about the economic downturn, and acknowledge that it will likely influence their future spending on your business. Most importantly, reassure your customers that your business is open to making changes to accommodate their budgets.

Also, use this as an opportunity to ask for feedback on how they would want your business to meet their needs during this time.

Take a Flexible Approach with Payments

Every business owner wants customers to make payments on time, or once an order is delivered. Some will even require customers to make upfront payments.

Regardless of whatever billing strategy you use, during an economic downturn it’s wise to be flexible; otherwise, you will lose loyal customers.

A flexible approach could mean giving customers more time to make payments or developing personalized payment plans. For example, if you’re a subscription-based business, don’t cancel a customer subscription on the renewal date. Extending the service by a few days is a show of goodwill and can make a big difference in your quest to retain your customer base.

Revamp Your Loyalty Program

Roughly 90 percent of businesses have a loyalty program in some form. If yours has worked great over the years, you might be tempted to keep it unchanged. 

However, during harsh economic times, consumers want the greatest value for their money, so your loyalty program might not be enticing enough. This is why you need to revamp it.

Some of the most successful loyalty programs embrace personalization, which is what you should do when refreshing your program for customer retention during a recession. Know the kinds of rewards your customers want and redesign the program with their needs in mind instead of offering the same rewards to everyone.

Increase Customer Retention to Beat an Economic Downturn

Shaky cash flow is a leading cause of small business failure. Yet, it’s exactly what’s bound to happen to most businesses when consumers cut their spending during an economic downturn. But if you’re able to maintain a high rate of customer retention, you will be in a good position to achieve cash flow stability and save your business.

Do you need more small business advice? Stay tuned to the business section of the blog.

Continue Reading

Business

What are your top business ideas that you think would be successful?

Published

on

By

What are your top business ideas that you think would be successful?

Introduction

A successful business idea is any concept that has the potential to generate profits and become a successful venture. Starting a business can be an exciting and rewarding experience, as it can provide both financial and personal satisfaction. With the right business idea and the right attitude, anyone can make it happen.

In this article, we will discuss ten business ideas that have the chance to be successful. From online coaching to pet care services, these ideas can provide the necessary foundation for starting your own business.

Business Ideas

1. Online Coaching: With the help of the internet, anyone can become an online coach and offer their services to a wide audience. Whether it’s career advice, health and fitness tips, or financial advice, there’s always a demand for those who can provide guidance and support in any field.

2. Online Personal Shopping Service: With the rise of online shopping, more people are turning to personal shopping services to purchase items they don’t have the time or energy to buy themselves. Becoming an online personal shopper can be a great way to make money while helping others.

3. Virtual Event Planning: The coronavirus pandemic has made it difficult for people to host large events, but virtual events are becoming increasingly popular. As a virtual event planner, you can help clients plan and organize everything from weddings to corporate events.

4. Food Delivery Service: With the rise of food delivery apps, this is an ideal time to start a food delivery business. You can partner with local restaurants and deliver their food to customers in your area.

5. Tutoring Service: If you’re an expert in a particular subject, you can offer tutoring services online or in person. Whether it’s for school, college, or test prep, there’s always a demand for tutors who can help students learn.

6. Home Cleaning Service: Cleaning is a chore that many people don’t enjoy, making it an ideal opportunity for a business. You can offer home cleaning services to busy professionals and busy parents who don’t have the time to clean their own homes.

7. Social Media Consulting: As more businesses realize the importance of having a strong presence on social media, social media consulting is becoming a popular business opportunity. You can help businesses create and manage their social media accounts, create content, and increase their reach.

8. Online Course Creation: If you have expertise in a particular field, you can create online courses that teach others about it. From cooking courses to coding courses, there’s always a demand for online courses that can help people learn new skills.

9. Freelance Writing: Freelance writing is a great way to make a living while writing about topics you’re passionate about. Whether it’s writing blog posts, creating web content, or writing books, there’s always a demand for writers.

10. Pet Care Service: Pet owners are always looking for reliable and trustworthy pet care services. Whether it’s pet sitting, dog walking, or grooming, you can start a business that helps take care of people’s pets.

Conclusion

These are just some of the business ideas that have the potential to be successful. With the right business idea and the right attitude, anyone can make it happen. Starting your own business can be an exciting and rewarding experience, as it can provide both financial and personal satisfaction.

Continue Reading

Business

Digital Fashion Week New York reveals a three-day schedule alongside NYFW

Published

on

By

Digital Fashion Week New York reveals a three-day schedule alongside NYFW

The organisers behind Digital Fashion Week New York have unveiled a jam-packed three-day schedule for its upcoming edition, set to run alongside the physical New York Fashion Week.

From February 9 to 11, the event will feature both physical and digital aspects, each designed to offer insights, vision and strategies for adapting to a digital future.

A Networking and Speaker Summit will be held in person on the first, during which industry figures will take part in panel discussions covering key topics from digital fashion, such as protecting models’ identities in the future and how artificial intelligence (AI) could change design.

The following day will see the opening of the event’s Metaverse Fashion Experience, where visitors can explore a virtual world using a Ready Player Me avatar that can be dressed in special garments from digital fashion week design winners.

During the event, it will be possible to attend virtual panel discussions that address critical issues and offer solutions to questions surrounding fashion’s future.

On the final day, both in person and online, visitors can view an animation screening followed by a performance by Mariah the Scientist with a layered phygital fashion show, as well as various other immersive experiences.

Designers involved include Ilona Song, RightDirection, Lorena Bello and Zero10, which has also worked on creating augmented reality (AR) iterations of designs by five digital creators, two of which will have physical representations at the shows in New York on February 11 and London on

Continue Reading

Trending