“Which business entity is better, a Corporation or a Limited Liability Company”? This question is often asked by many of our clients who wish to start a new business. Here is some information in helping you determine which business structure better fit your needs, but we advise our clients to seek advice of a CPA to ensure the proper business structure provides our clients with the greatest tax advantage. There is no “right” answer – each business entity has certain benefits that may be more advantageous to individuals. The more you know, the more informed decision you can make. Contact a Business Lawyer today to help you get pointed in the right direction.
In a Limited Liability Company (an “LLC”), the main governing document is an Operating Agreement. An Operating Agreement lays out the rules which the organization will abide by and outlines each Member/Manager’s rights and responsibilities. This is not filed with any state organization. An LLC is a single tax entity, meaning that the losses and profits are reported on the individual’s taxes and the organization does not file its own taxes.
A Corporation is governed by By-Laws. This document outlines how shareholders (people with ownership interest in the company) will elect officers and board members. These elected officers will make the day to day decisions for the corporation. A Corporation is a double taxation entity, this means that it files taxes as an organization and the individuals report the losses or profits on their own filings (i.e. it is taxed at both the corporate tax level and the individual one). 
A Limited Liability Company is an entity that can be formed by filing a document called Articles of Organization with the Secretary of State’s Office. This is fairly inexpensive and allows for a flexible management structure. An LLC will help protect the owner’s personal assets. This means your personal assets can be shielded from the business debts or liabilities. For example, your LLC will owe the debts and not you, personally There are some exceptions if the LLC formalities are not followed or if you agree to take personal responsibility for the LLC’s debts. This can be prevented by making sure that the LLC’s activities are managed and operated as a separate entity from personal activities of the person. For example, make sure that the LLC’s funds are not comingled with your personal finances.
Another important item to note is that, for tax purposes, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return (a “disregarded entity”). When filing as part of the owner’s tax return as a single-member LLC, the individual will report the losses and profits of the LLC on their individual tax returns, which can make filing taxes easier for an LLC as compared to a Corporation.
A Corporation is another popular business entity to consider. A Corporation is formed by filing Articles of Incorporation with the Secretary of State’s office. These are a little more expensive than an LLC’s filing, usually ranging from $100-$800 depending on the state. Properly filing your Articles of Incorporation with the correct state entity could be worth the initial costs if you decide a Corporation is right for you.
A Corporation also provides liability protection for owners; and as long as the corporate formalities are followed, it will be difficult for a creditor to hold the owners or shareholders responsible for the corporation’s debts.
One benefit of a Corporation is that ownership interests are easily transferable, compared to that of an LLC. The way to transfer an interest is to transfer ownership shares to a new owner. Corporations generally have an easier time raising capital, money, than other entities. This is important to consider if you are looking for investors.
On the other hand, Corporations have more regulations to follow than LLCs. They are required to keep more records, such as records of all shareholders, directors and officers. Unlike an LLC, a Corporation will file and pay taxes on its own earnings. While this can be time consuming, one benefit is that earnings can stay in the corporation to fund future expansion and expenses. The money that stays within the corporation at the end of the year will be taxed at corporate income tax rates, which are generally lower than individuals, but there is a limit to the amount of money that can be kept in the Corporation. Another benefit is being able to deduct fringe benefits, which are commonly paid to the Corporation’s owners and employees. The employees are not taxed on these benefits separately, which has the potential to leave more money in the employee’s pocket. As overwhelming as it might seem to have to file Corporate taxes there are some true benefits to doing so. It is important to consult with a proper tax expert to determine what money can be left in the organization and what money can be deducted.
This is just a very brief overview of LLC and Corporations. There are many factors to consider with forming your entity. There are pros and cons to each entity and in the end having a more informed decision will help to confirm that you are taking your business in the right direction. After you have consulted a CPA, a Business Lawyer can assist in getting your business formed and properly protecting your interests during its operations.