What is right for your business? »Small business fire

The choice between a Limited Liability Company (LLC) or Incorporation is essential because any business law structure will affect your busin

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The choice between a Limited Liability Company (LLC) or Incorporation is essential because any business law structure will affect your business operations, taxes and funding. The structure of your company also affects how much of your personal assets are at risk. So, you need to choose the one that balances your benefits and legal protection for your business and your personal assets.

While both business structures can protect your personal assets, here are other essential factors to consider when choosing which one is right for your business:

1. Tax

Your net income is taxed when you reach the corporate level at 21%. In addition, your shareholders will have to pay federal insurance contribution law (FICA) taxes and income tax on the dividends they receive from your business’s profits. This is called ‘double taxation’.

Basically, when it comes to taxing investors, the LLC investor has to pay taxes even if they have not received a distribution. Meanwhile, an incorporation investor only pays taxes if they receive dividends.

If you plan to make a profit in the coming tax year, an incorporation may be better because all profits transferred are taxed at about 21%. On the other hand, an LLC member must pay state income tax, federal income tax, and FICA tax for the same scenario. This can lead to less profit to transfer.

But if you want to grow your small business and pay LLC owners out of your profits, an LLC may be a better choice. Instead of double taxing, your business will have a throughput tax. This means that the owners will pay the tax on the dividends and net income they receive instead of the business.

2. Business ownership

Ownership is another important factor when comparing LLC vs. Inc. Regardless of an LLC member’s financial contribution, the LLC may distribute its ownership interest to them. They will also receive the equal shares of profits stipulated by the LLC in its operating agreement. This gives you additional flexibility in business ownership.

The LLC’s operating agreement also contains the repercussions when an LLC member leaves and the subsequent procedure for transferring membership interests between the members. In addition, any trust, other corporations and foreign individuals may be an LLC owner. This will allow you to make appropriate decisions for your business when you need help from such individuals or parties.

On the other hand, an corporation has shareholders who can sell the business’s percentages and shares of stock. The shareholders then have the right to sell stock or buy more to acquire a larger percentage of the business. Unlike LLC, the business can still exist when a shareholder sells or leaves the company.

3. Management

Incorporation has a stricter management structure than LLC. The former has officers to manage day-to-day operations and a board of directors that oversees the business. It is also essential that record keeping and paperwork for directors ‘and shareholders’ meetings exist in the incorporation. Ideally, these meetings should take place every year.

Meanwhile, management in the LLC is different than an incorporation. The owners of the LLC can delegate managers for the business, making them like passive investors. It is also possible that the owners may also be the managers. They do not require titles or traditional roles such as Vice President or CEO, as long as they have a suitable management structure.

4. Other obligations and filing

Annual submission obligations also differ between the two structures. Unlike incorporations, LLCs do not require minutes of any company meetings or hold annual meetings at all. In some states, you do not even have to submit annual reports. It allows you to run your business flexibly, especially when you are just starting out, as you do not have to meet tedious corporate requirements.

As mentioned, an annual shareholders’ meeting and annual report are required for all corporations. They must maintain, maintain and record the essential matters discussed by the shareholders during the meetings. This may include the framework for issuing forms of compensation, bonuses and dividends.

5. Funding opportunities and options

Your business’s ability to receive funding is affected based on your business structure. This is important for business growth goals, hence the need for investors.

You may find it difficult to find venture capitalists and obtain bank financing in an LLC structure. In addition, before you receive stock investment, your investor must first become an LLC member or owner. This means the investor can get more rights to control the company.

The members can have a say in your business activities, although they may choose to become passive members. Consequently, if you are unable to generate financing, you can take out personal loans, which typically destroys the concept of limited liability of your business.

For this reason, passive investors are more attracted to corporations due to the division between management and ownership. In addition, most management documents do not allow venture capitalists to invest in LLCs, which makes them prefer corporations. In addition, most investors also want stock options that can offer an incorporation.

So if your business is capital intensive, then an Incorporation is a better option because it is also easier to obtain bank financing for your company.

Another factor that makes investors like corporations better than LLCs is the financial rights. A shareholder’s percentage of the number of shares held is the basis for distributions. For example, a 12% shareholder of the incorporation will receive USD $ 120 if your company has a USD $ 1000 dividend.

As mentioned, the operating agreement will be the basis of the distributions in an LLC, regardless of their financial investment in the company. The operating agreement also assigns the annual losses and gains to the owners.

Meanwhile, shareholders have no say in how dividends will be paid, as it will be the directors’ responsibility. The allocation of losses and income will also depend on the percentage of ownership in an S-corporation, while no distribution in a C-corporation.

By knowing the differences between an LLC and incorporation, you can better understand which structure is best suited for your business. Typically, LLC is a good one if you are a beginner who does not need more funding or if you do not want the hassle of more paperwork. But an incorporation will be better if you need more investors for your business growth.


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