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Should I Incorporate or LLC?

Finding out which is best for your business

For protection and increased longevity for your business, there's nothing like incorporating or becoming an LLC. There are tax benefits, more credibility, and a safety net that keeps a business running even if something happens to its owner, directors, or shareholders. However, how to decide between incorporating and making your business an LLC? Each type of business entity has its own unique benefits and disadvantages, yet each is aimed to benefit your business and keep it safe.

Incorporation

Incorporating a business is defined as the legal separation of a business entity from its owner. This new business "person" is completely independent, meaning that even if something happens or changes take place with owners or administrators, the business will keep running and functioning as normal and without having to also change.

A benefit that comes with choosing to incorporate your business is the possibility of opening up to investors. By deciding to become a C-corporation, or qualifying as an S-corporation, your business becomes open to shareholders, which can raise capital easily and efficiently. Because of this, the potential growth of your business is unlimited. Not only that, but incorporated businesses receive liability protection which ensures, most of the time, that owners' assets are not touched in the case of a lawsuit. The funds will only come from the business's assets.

While incorporated businesses may receive certain tax benefits like deductible expenses, oftentimes corporations are taxed double on income. This means that the corporation's profit is taxed first as a corporate tax and again as an individual tax once the shareholders receive their portion. This is due to the legal separation of the business from its owners as described above.

Other benefits of incorporation include:

  • The ability to be owned by another business
  • An unlimited number of owners (not applicable for an S-corporation)
  • Unlimited life for your business because of its own entity
  • Brand protection

LLC

In short, if a business decides to become a Limited Liability Company, that business's members cannot be held accountable for the business's debts and liabilities if something goes wrong. While the same is true for a corporation, the structure of LLC's contains several differences that many businesses prefer over the incorporation option.

Like a C-corporation, LLCs have the option of an unlimited number of owners, and those owners do not necessarily have to be U.S. residents. An LLC can also be owned by another business. Unlike corporations, LLC setups do not generally allow for shareholders, meaning this potential capital is lost. However, this places the ownership of the business into the hands of the business's "members" rather than a business's investors.

Flexibility in business structure is another benefit of choosing the LLC option. While corporations often require corporate structuring to match (a separation between owners and administration officials), LLCs do not need to make such a distinction, allowing any member of an LLC to make administration decisions or hold a managerial position.

As far as taxes are concerned, LLCs are not double taxed like C-corporations. Because there is no specific tax entity for an LLC, these businesses are allowed to choose their own tax entity (C-corporation, sole proprietorship, etc.). If the LLC does not choose to be taxed as a C-corporation, they avoid the double taxation and the taxes will come from the owners' individual tax returns.

Other benefits of choosing an LLC option include:

  • Less corporate paperwork
  • No requirement to maintain yearly minutes and meetings
  • Cost-efficient

It should be noted that LLCs are a relatively new entity, being the combination of corporation and sole-proprietorship. Because of this, many laws pertaining to LLCs can differ depending on the state the LLC is in. It will pay to be familiar with those laws in your state before deciding on the LLC option for your business.

Overall, while both the incorporation and LLC options present numerous benefits respectively, they also present their fair share of challenges. Before making this important decision, be sure to consider your business's risk of liability, how you wish to be taxed, and which of the options' benefits you find most attractive. No two businesses are the same, and it is also important to consider your business's objectives and goals when incorporating.

Incorporating or forming an LLC is easier than ever in the digital age, and we've got the tools and know-how to help you make your business goals into realities. Check out our business services page to see your online options for incorporation, or contact us today to learn more about how we can help your business!

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