You’ve got a great idea and are ready to start your own business. How exciting!
If you are like many new business owners, you are probably wondering how to legally structure your new business. You have heard about LLCs and corporations, but do you know the difference? Do you know which is the best option for your business?
If not, you need to consider the goals and strategy for your business and your personal finances. An experienced Monroe, NC business law attorneys can help answer many of the questions you may have.
For example, do you want the business to be separate from your personal assets and debts? Do you want to be taxed once at a potentially higher rate or do you want to file separate tax returns for the business? Do you want to take on investors to help grow the company? How much control do you want over the day-to-day operations and strategy?
Your answers to each of these questions will help evaluate the advantages and disadvantages of each option and find the best fit for your business.
What is an LLC?
A Limited Liability Corporation, or LLC, allows business owners to separate their personal finances from the assets and liabilities of the business.
Advantages of an LLC:
- It is the lease complex business structure.
- Pass-through taxes: As the owner of the LLC, you will report your share of the profit and loss on your individual tax return. As a result, you will not need to file a corporate tax return and you will not get taxed twice.
- Limited Liability: You are not personally liable for the business’s debts and obligations. Business creditors are not entitled to the business owner’s personal assets. Owner’s creditors are not entitled to the business’s assets.
- There is no limit on the number of owners.
- The owner(s) have full control over how the business is managed and do not need to report to a board of directors or shareholders.
- You are not required to hold an annual meeting or record meeting minutes.
- There is no residency requirement. You do not need to be a U.S. citizen or have permanent resident status to own an LLC
Disadvantages of an LLC:
- An LLC cannot issue stock. As a result, LLCs are often limited in their potential growth because they cannot attract investors.
- Owners can be subject to self-employment taxes.
- If you convert an existing business into an LLC, you could incur additional tax obligations on appreciated assets.
- LLC owners cannot lower their tax liability through corporate income tax splitting.
- The laws governing LLCs can vary from state to state.
What is a Corporation?
Corporations are considered separate entities and are taxed at the corporate tax rate.
Advantages of a Corporation:
- Since corporations can issue stock, it is easier to obtain capital to grow the business.
- You can choose how you want the profits and losses allocated through different types of corporations. In a C Corporation, which is the most common type of corporation, the corporation owns all its own profits and losses and pays taxes as its own taxpayer. In an S corporation, the income and losses are allocated to shareholders and each shareholder is taxed on their own. Splitting the income among shareholders can help lower the overall tax liability.
- No limits on the number of owners.
Disadvantages of a Corporation:
- Limited control over management: Owners of a corporation, or shareholders, do not make the day-to-day decisions over strategy and operations. Instead, the shareholders appoint directors who effectively run the company. Shareholders can vote on issues that effect their economic impacts but otherwise have very little control over the company.
- Limited protection against creditors: Shareholder’s creditors can assume the shareholder’s stock and ownership rights. If this happens it is possible for the creditors to gain voting rights that can dissolve the company.
- In a C corporation, corporate profits are taxed twice. S Corporations are not.
- Corporations must hold annual meetings and record meeting minutes.
An experienced Monroe, NC business law attorney can help decide which type of incorporation is best for your business and help you get it set up correctly. Contact the lawyers at Perry, Bundy, Plyler and Long LLP to discuss your business needs today.
You can reach us at 704-289-2519.