One of the first things a new business owner needs to figure out is what sort of entity they want to file their new business as. This question can be answered based on the specifics of your new business as well as what you need as the business owner. Do you need more protection for your personal assets? Are you more focused on less tax fees or less paperwork?
Unless your business fits in the nonprofit bracket, the two most popular entity types for new entrepreneurs to choose from are corporations and LLCs. They both come with their fair share of positives and negatives, but ultimately an entrepreneur’s choice should depend upon what specificities are best for their business (which can only be determined after doing a good amount of research).
However, looking at the two entities side by side without any particular industry or business in mind, I’ll always think of an LLC as the better of the two to maintain for the following three reasons:
1. You’ll avoid double taxation
LLCs have something called a pass-through taxation structure. This means that an LLC is a legal entity in which income “passes through” to investors and owners, or the income of the business is actually the income of the investors and owners. An LLC also has the ability to change the way it’s taxed if the business owner isn’t a fan, for whatever reason, of that structure.
Corporations, on the other hand, experience almost the opposite tax effect in most states. They experience “double taxation,” which is a corporate tax rate that is levied against a corporation’s profits. Shareholders then additionally have to pay personal taxes on whatever income they make from the business.
2. You’ll effectively protect your business as well as your personal assets
When you first start a business, your personal assets are attached to your new business. That means if your business fails and you have some major debt to pay, your home, car, and other personal items are at risk of being seized from your possession. A corporation does do the job of turning the business into its own legal entity, separating it from the business owner. This means that the business can now hold its own debts, can be paid separately, and is taxed separately from the owner. This gives the business owner some protection in separating himself from his business. With the LLC, a business owner is rewarded the same legal and fiscal protection as a corporation, but in a less complicated manner than with a corporation.
3. It keeps things simple
All things considered, running an LLC can be pretty easy compared to running a corporation. Different states regulate certain entities differently, but for the most part, an LLC can get by with just an organized record of major business decisions and your business’s finances. Some LLCs can even get away with opening with just one member. They also don’t need to worry about annual shareholder/member meetings like corporations do.
LLCs do, however, need to send in an annual report with updated information on the names and addresses of those involved with the business and to pay a fee as well. Though those additional areas are included, maintaining an LLC is still much easier than maintaining a corporation.