When you are just starting your business, you probably have millions of questions. One of them should be whether you should establish it as an LLC or as a corporation. Now is the time to understand the differences and do what best fits your needs.
Let’s start with some definitions. An LLC, short for limited liability company, is a very popular and inexpensive structure that lets you set up a business without jeopardizing your own personal assets. Furthermore, it gives you a great deal of flexibility. It is its own distinct legal entity with a unique tax identification number. Under its name, you can open an account and do business secure in the knowledge that your personal assets and those of the other members of the LLC will not be targeted if the business goes bankrupt. This structure does not have stringent requirements and gives you a lot of freedom even when it comes to making a tax plan and structuring your management.
By contrast, corporate structures are much more rigid. The two most common kinds of corporations are S and C, with C corps being the standard model and S corps having a special tax status with the IRS as well as restrictions pertaining to ownership. Both models offer limited liability to protect members’ assets against bankruptcy. Both require the filing of documents to the state and are their own separate legal entities. In terms of structure, shareholders own the company and elect the board of directors that oversees the general running of the business. The board elects officers to take care of the company’s day-to-day affairs. There are certain required formalities for both S and C corps, including establishing bylaws, conducting shareholder and board meetings, issuing stock and filing annual fees and reports.
In the case of traditional corporations, stockholders can take away control from management if they are discontented. If you provide a service or sell a product that is at high risk for liability claims, an LLC can shield you from the possibility of losing control of what you have worked so hard to build. In addition, filing as an LLC saves you from the double taxation whammy that plagues corporations. With double taxation, the corporation, a separate legal entity in itself, is first taxed for its income. Then that same income is taxed at the individual member level. With an LLC, you can opt to only be taxed at the individual level, thus lowering your costs.
On the other hand, the ability to sell stock can be a great advantage for some companies. It gives them a way to raise significant amounts of cash quickly. This is not allowed with an LLC. If you want your business to grow at a faster rate, setting up a corporation may be your best bet.
There are no right or wrong answers to the question of how to structure your business. You are the best judge of your company’s needs and its long-term goals. However, no matter how you slice it, you should never minimize the importance of having a comprehensive small business liability insurance package in place. It will form an invaluable safety net that will protect you against the heavy burden of injuries, theft, property damage and errors and omissions. A well-designed policy can take a great deal of the stress out of owning a business, whether it is an LLC or a corporation.