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LLC vs. Incorporation: Which Should I Choose?

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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.

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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.

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Trucking Companies: An Essential Part of the Supply Chain

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Trucking Companies: An Essential Part of the Supply Chain

Trucking companies are a crucial part of the modern-day supply chain, responsible for delivering goods and materials from one location to another. From small-scale local delivery services to large multinational corporations, trucking companies play a vital role in connecting businesses with consumers and ensuring that essential goods reach their destinations in a timely manner.

The history of trucking companies dates back to the early 20th century, when trucks first began to be used for commercial purposes. Since then, the industry has grown exponentially, with technological advancements, changes in regulations, and increased globalization driving the growth of trucking companies around the world.

Trucking companies typically offer a range of services, including local, regional, and long-haul deliveries. They may specialize in a particular type of cargo, such as hazardous materials, or offer a range of services, including warehousing and distribution. Some trucking companies also provide specialized services such as refrigerated transportation, flatbed hauling, or oversized loads.

One of the key benefits of working with trucking companies is their ability to offer flexible, efficient, and cost-effective delivery services. With a large fleet of vehicles and a network of distribution centers, trucking companies can provide fast and reliable delivery services, regardless of the size or type of shipment.

In addition to the delivery of goods, trucking companies also play a critical role in reducing congestion on the roads and highways. By utilizing advanced routing and dispatch systems, trucking companies can optimize their delivery routes, reducing the number of vehicles on the road and helping to minimize traffic delays.

Another advantage of working with trucking companies is their ability to offer a range of value-added services, such as packing, loading and unloading, and custom clearance. These services can help businesses streamline their operations, reducing costs and increasing efficiency.

However, like any industry, trucking companies are not without their challenges. One of the biggest challenges facing the industry today is the shortage of qualified truck drivers, which has led to increased costs and reduced capacity for many companies. In addition, the high cost of fuel, insurance, and maintenance can also pose a significant challenge for trucking companies.

Despite these challenges, the trucking industry continues to play an essential role in the global economy, connecting businesses with consumers and helping to keep the wheels of commerce turning. With a focus on innovation, efficiency, and customer service, trucking companies will continue to play a key role in shaping the future of the supply chain.

In conclusion, trucking companies are an integral part of the modern-day supply chain, offering a range of delivery services that help businesses connect with consumers and ensure the timely delivery of goods. With a focus on innovation, efficiency, and customer service, trucking companies will continue to play a vital role in shaping the future of the industry.

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Landscaping Business: A Guide to Starting and Growing Your Own Business

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Landscaping Business: A Guide to Starting and Growing Your Own Business

Landscaping is a multi-billion dollar industry that offers a range of opportunities for entrepreneurs looking to start their own business. Whether you are an experienced landscaper or just starting out, this guide will provide you with the essential information you need to get your landscaping business up and running.

Step 1: Determine Your Niche

The first step in starting a landscaping business is to determine your niche. Are you going to specialize in residential or commercial landscaping? Do you want to offer lawn care services, garden design, or tree care? It’s important to choose a niche that you have a passion for and that you feel confident in delivering quality services to your clients.

Step 2: Create a Business Plan

Once you have determined your niche, the next step is to create a business plan. Your business plan should include your business goals, target market, marketing strategies, operating costs, and financial projections. This will help you stay focused and on track as you start your business.

Step 3: Register Your Business and Obtain Licenses

Before you start your landscaping business, you need to register your business and obtain any necessary licenses and permits. This will vary depending on your location, so it’s important to check with your local government to determine what you need to do.

Step 4: Invest in Equipment and Supplies

To provide quality landscaping services, you will need to invest in the right equipment and supplies. This may include lawn mowers, trimmers, edgers, and other landscaping tools. You will also need to purchase supplies such as mulch, soil, and plants.

Step 5: Market Your Business

Marketing your landscaping business is essential to attracting new clients and building your brand. You can use a variety of marketing strategies, including online advertising, social media, and local print ads. You can also offer special promotions and discounts to attract new customers and keep your existing ones coming back.

Step 6: Deliver Quality Services

The key to success in the landscaping business is delivering quality services to your clients. Make sure you are providing high-quality workmanship, and always be prompt and professional with your clients. You can also ask for referrals from satisfied customers to help grow your business.

In conclusion, starting a landscaping business can be a rewarding and fulfilling experience. With hard work, dedication, and a passion for your work, you can build a successful landscaping business that provides you with a steady income and a sense of accomplishment.

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Catering Business: A Thriving Industry in the Food Service Industry

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Catering Business: A Thriving Industry in the Food Service Industry

Catering business is a subsector of the food service industry that involves providing food and drinks to clients at various locations such as weddings, corporate events, parties, and other special events. It is a growing and lucrative industry that offers a variety of opportunities for entrepreneurs who have a passion for food and hospitality. In this article, we will take a closer look at the catering business and its prospects for growth in the future.

The Demand for Catering Services

The demand for catering services has been steadily increasing in recent years due to the growing trend of hosting events and parties outside of the home. This trend has been driven by a number of factors including busy work schedules, the desire to create a memorable experience, and the convenience of having everything taken care of by a professional catering service. As a result, catering businesses have become increasingly popular, especially in urban areas where there is a high demand for their services.

Opportunities for Growth in the Catering Business

There are many opportunities for growth in the catering business, including expanding into new markets, offering new and innovative menu options, and investing in technology to streamline operations. For example, catering businesses that cater to specific dietary needs, such as gluten-free or vegan options, have seen significant growth in recent years. Additionally, the use of technology to streamline operations, such as online ordering and delivery systems, has made it easier for catering businesses to reach new customers and expand their reach.

Starting a Catering Business

Starting a catering business requires careful planning, hard work, and a passion for food and hospitality. It is important to conduct market research to determine the demand for catering services in your area, as well as to identify your target market and competition. From there, you will need to create a detailed business plan, secure financing, and develop a strong brand identity.

To be successful in the catering business, you will also need to have a strong culinary background and a good understanding of food safety and sanitation practices. You may also need to invest in equipment such as ovens, refrigerators, and other kitchen equipment, as well as in marketing and advertising to reach potential customers.

Conclusion

The catering business is a thriving industry that offers many opportunities for growth and success. By carefully planning and executing a solid business plan, entrepreneurs with a passion for food and hospitality can start their own successful catering business and make a real impact in the food service industry. With the increasing demand for catering services, the future of the catering business looks bright and full of potential.

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