Now that you have taken the exciting leap into entrepreneurship, you have many critical decisions to address. An early one involves choosing a legal structure for your company.
Most business owners select a limited liability company (LLC) or a corporation, but which one suits your business? Unpack the key differences to help you decide.
Both shield personal assets from business debts and lawsuits. In other words, either structure can protect your personal possessions or savings if things go south. However, there are nuances.
LLC members enjoy “pass-through taxation” This means profits and losses are reported on their personal tax returns.
Corporation shareholders have stronger protection, with a clear separation between personal and corporate finances. However, this comes at the cost of double taxation: corporations pay taxes on profits, and shareholders pay taxes again on dividends received.
With an LLC, you have flexibility. It can be member-managed (members manage the business) or manager-managed (a designated manager oversees operations). This allows for customization based on your team’s strengths and preferences.
Corporations have a more rigid structure with a board of directors, officers and shareholders. Although this can benefit larger businesses with complex ownership structures, it might feel cumbersome for smaller ventures.
Formalities and costs
It is generally easier and more affordable to create and maintain an LLC. For example, filing fees may be lower, and LLCs have fewer documentation requirements in most situations.
As you might expect, corporations have more formalities, including meetings, board elections and meticulous record-keeping. Typically, this translates to higher filing fees and ongoing compliance costs.
Having experienced legal guidance can help you get a realistic perspective on your circumstances. It can help you review each option and choose the structure that better sets your company up for success.