Benefits of an LLC over a Corporation
Each business entity has its advantages and disadvantages. There isn’t an overall perfect business type; only a business type that is perfect for your business. Here, we’ll discuss the benefits of LLCs over corporations.
Separation of Assets Without Complexity
LLCs retain the simplicity of a sole proprietorship or partnership, while providing the liability protection that corporations have. When you incorporate your business, you separate your personal assets from your business’ assets. This limits your liability. Meaning that, if anything were to happen down the road, creditors and debtors cannot come after your personal holdings to account for your business’ losses. While this typically applies to all corporations, it also applies to most LLCs (with some exceptions) — This sets them apart from other simple business structures like sole proprietorships or partnerships.
One of the benefits of forming an LLC instead of a corporation is the fact that LLCs can choose how they want to be taxed. That’s right, it’s up to you! You can choose to be taxed as a sole proprietor or partnership (which is the default for LLCs); but you can also choose to be taxed as an S-Corporation or C-Corporation too. The choice lays in your hands.
C-Corporations are subject to what is known as ‘double taxation’ where the business pays corporate income tax and then its shareholders must also pay taxes on the dividends they receive. LLCs and other business entities can have a pass-through taxation structure where the taxes are passed through to the owners on their personal tax returns. Each tax structure has its benefits and disadvantages, so you’ll want to talk with a business attorney to determine what structure will be best for your LLC.
LLCs don’t have any restrictions on the type or number of owners (called “members”) they can have. While S-Corporations also avoid double taxation, they cannot have more than 100 shareholders, cannot have foreign shareholders, and cannot have corporations as shareholders. LLCs can have the pass-through taxation benefit while also having corporations, foreign entities, or individuals as ‘members’.
LLCs also don’t have a formal structure that they need to rigidly follow. Corporations, on the other hand, have an elected board of directors that sets and oversees policies as well as officers or managers that run the business’s daily operations. With a lack of formal structure, the owners of LLCs have the flexibility to make their own decisions about how they want to run the company. They also have control over how the profits are distributed. Unlike corporations, LLCs don’t have to distribute profits evenly or according to ownership percentages.
Corporations typically have to hold shareholder meetings, provide annual reports, and keep extensive records. LLCs, however, do not have these requirements. Fewer regulations mean less paperwork and make it easier to satisfy governmental requirements.
If you’re planning on starting an LLC, or you’re looking into which business entity would be best for your business, schedule a consultation with us at Bagla Law Firm. We’ll be happy to assist you on your business journey.