What is the difference between an LLC and a Corporation?
Starting your own business can be an overwhelming and emotional step on its own. Trying to decide what kind of business you’re going to register can bring on a whole new level of stress. Registering your business with the state is essentially the first step to starting your own business. This step can easily be a smooth step with the right information.
Every day, bright new entrepreneurs are ready to take the leap in pursuing their passion while being their own boss. The first big question he or she is faced with is what kind of business to register with the state? There are 2 common entities that are most often used: LLCs and Corporations. In this article, we have compiled some basic points to each one.
- What is an LLC? An LLC is a hybrid type of structure that provides the personal liability protection of a corporation as well as the tax benefits and flexibility of a partnership.
- An LLC protects your personal assets should a lawsuit be filed against your company.
- Taxes can be filed in different ways with an LLC. You can use “pass-through” taxation, which enables you to report the company’s gains and losses on your personal tax return. Taxes in this manner, are not paid on the business level.
- You can also choose corporate taxation if you prefer. This means that your business will be taxed at a lower rate for the first $75,000 of income.
- With an LLC, you can lease your assets. For example, if you use your home office to work from, the LLC can lease the office from you, the individual. This creates a business expense that can be written off and adds more income to your family’s bottom line.
- Forming an LLC builds credibility, because it shows that you have made a formal commitment to your business.
- LLCs have fewer state annual requirements, paperwork, and start up costs compared to S-Corps and C-Corps.
- There are couple of downsides to an LLC, however:
–One is that the ownership is more difficult to transfer. Typically, all members must agree when adding on a new member and altering the ownership percentages.
The Corporation (S-Corp & C-Corp):
- These are the two common types of corporations: The S-Corp and the C-Corp. The S-Corp is a “pass-through” entity like the LLC. On the other hand, a C-Corp gets taxed as a separate entity and is subject to double taxation, if the owners receive profits in the form of dividends.
- A C-Corp pays taxes at an entity level first, and then the owners get taxed at the individual level on profits earned as dividends, thus the double tax.
- An S-Corp gives business owners the ability to use business losses as deductions on their personal tax returns. Expenses, such as start up costs, can be categorized this way.
- An S-Corp can also provide savings on Medicare, social security, and employment taxes.
- C-Corps are usually at lower risk of being audited by the government.
- S-Corps can have no more than 100 owners, and owners cannot have a “non-resident aliens” residency status.
- Because owners of a C-Corp can hold different stock interests, venture capitalists tend to gear towards C-Corps when investing funds in a business. These investors are attracted to the dividends that await if the corporation brings in profits.
- S-Corps can not be owned by C corporations, LLCs, other S corporations or non-qualified trusts.
- C-Corps can accumulate and retain earnings from year to year, if they are within reasonable limits.
These bullet points are just the main differences and benefits between the different types of entities. While looking through this information and in doing your own research, you must consider what will work best for you. What are your short-term and long-term goals? This will help you decide on which tax benefits will benefit you the most. It’s also advised to consult your Accounting/Financial Professional and/or lawyer for advice. It’s possible to do things such as requesting S-Corp status for your LLC.
Arias & Arias Financial has been serving Florida and operating out of Fort Lauderdale since 2012. Arias & Arias Financial takes pride in working with the owners and partners of small to medium-sized businesses to achieve their vision.
We have accounting and business consultant professionals on staff to serve you for all your accounting, bookkeeping, and business consulting needs.
The articles we share are items of interest and related to some questions we have answered in the past. If you have a question or would like to schedule an appointment please contact us at 954-650-1825.