Why Would You Choose an LLC Over a Corporation?

LLCs vs. Corporations

LLCs are far more common and popular than Corporations, and for good reason. The basic advantages of an LLC include:

  1. Taxation: Get pass-through income to avoid many corporate taxes and gain the ability to report business profits/losses on your personal tax return. Those returns are also easier to fill out, whereas a Corporations’s are complicated.

LLCs: A Closer Look

An LLC (or limited liability company) is a simple business entity that designates a business as a formal legal entity. LLCs are owned and most often managed by their members (member-managed), although some LLCs may appoint a manager (manager-managed) to run the business.

In many states, LLCs provide continuity of the business, as the business will continue to exist even if one of the members leaves the business or passes away.

Choosing Between LLC, S Corp, and C Corp

The limited liability company (LLC), S corporation (S-corp), and C corporation (C-corp) are all business structures that you may be considering. The LLC is a low-maintenance legal entity that’s best for a simple business.

C Corporations vs. S Corporations

What’s the difference between a C Corp and S Corp? Limited liability helps protect an owner’s personal assets from being used to pay business debts (but not if you co-sign a business debt in your individual capacity).

Corporations of a certain size (fewer than 100 shareholders) may elect to have S-corp status and avoid the double taxation issue, but even a C-corp may be able to find deductions and other ways to make the additional tax burden less painful. Despite some of the potential drawbacks, forming a C-corp can make the most sense for businesses of a certain size and level of ambition.

LLC Operation

LLCs are structured under an Operating Agreement, which is a contract between the owners (called "members”) specifying how it will be run and how the economic burdens and returns will be split between the partners.

LLC and S Corp: Clarifying the Difference

Limited liability companies (LLCs) and S (Subchapter) corporations are often discussed together, but this is misleading. The difference between LLC and S corp is that an LLC is a business entity while an S corp is a tax classification.

Key Takeaways

First off, a Limited Liability Company (LLC) is a hybrid business structure that combines elements of a partnership, corporation, and sole proprietorship. This structure offers some personal liability protection–your personal assets can’t be seized to cover business debts.

Comparison Between LLCs and Corporations

Both LLCs and corporations protect owners from liability for obligations. An LLC provides benefits of both corporation and partnership structures. LLCs can suit higher risk businesses. Owners wanting lower tax rates than corporations may prefer LLCs.

Choosing Between LLC and Corporation

Most owners choose either an LLC or a corporation. Compare considerations in this decision. Both are formed by state filings.

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