You have finally decided to start a business of your own. Or, maybe you have been running one as a sole proprietor, even moonlighting on the side, and have decided you need to protect your personal assets from those involved with your growing business. You might even decide there could be a tax break in it for you. Whatever your reasoning, you are likely contemplating a choice that many entrepreneurs face: how should your business be structured? The difference between an LLC and a corporation can be complicated when looking at the fine details of both legal entities. These fine details can sometimes be the deciding factor in choosing to become an LLC or a corporation. You should contact JV LAW GROUP before you file your paperwork.
Legal Entity vs Tax Entity
Before going any further, a distinction between a legal entity (LLC v. corporation) and a tax entity (sole proprietor / partnership vs. C-corporation v. S-corporation) must be made. Often, new entrepreneurs get these two concepts mixed up and will end up unnecessarily confused. A tax entity classification is simply the way the IRS (and the State Taxing board) sees the business. The legal entity classification is how everybody else (i.e. courts, state, contractual partners) sees the business.
Taxes
As mentioned above, an LLC has complete flexibility on how it wants to be taxed, whereas a corporation may not. A major disadvantage to the corporate designation is its double taxation implications. A corporation’s profit is taxed once (corporate tax), and the dividends its shareholders receive is then taxed again (individual tax). The S-corporation designation does allow flow through taxation (no corporate tax), but there are certain requirements to qualify as an S-corp that may limit its utility to a business.
If a business qualifies as an S-corp, the tax difference between an LLC and S-corp are a bit more nuanced. Consult JV LAW GROUP before making a decision on whether to be taxed as an LLC or S-corp.
Business Ownership
The owners of a corporation are the shareholders. The owners of an LLC are its members.
Business Operation
Any member of the LLC may act as the LLC’s manager(s) and the LLC can elect to have no distinction between an owner and manager of the LLC. A corporation must have a corporate structure with a Board of Directors handling the management responsibilities and the corporate officers handling the day-to-day operations. The shareholders as a class are considered the owners of the corporation, but remain separated from the business decisions of the corporation (except for approval of major corporate decisions) and only retain the power to elect directors.
Due to the many legal and tax implications, it is very important to seek assistance from a qualified professional before you file your paperwork. It may be one of the most crucial decisions you make in the well-being of your business.
If you need assistance, please do not hesitate to contact JV LAW GROUP.
