Choosing your legal business structure is one of the most important decisions you will make as a small business owner. As with most business decisions, there is no one-size-fits-all solution for selecting the best option for your business formation. The classification you choose ultimately depends on your business goals, ownership structure, and more.
But how do you determine whether a Limited Liability Company (LLC) or a Corporation is best for your business?
LLC vs. Corporations at a glance
Both are separate legal business entities that offer liability protection for their owners and have state compliance requirements that they must meet
From there, each business classification has its unique requirements depending on the type of corporation or LLC. The main aspects include the ownership restrictions, management structure, and taxation of each kind of business.
Ownership and management
LLCs
LLCs can have one owner or multiple owners called members. They have a very flexible ownership structure — they can be owned by individuals, trusts, estates, other LLCs, corporations, and foreign individuals.
LLCs also have more flexibility in distributing income, losses, and credit items
LLCs allow for greater flexibility in their management structures. Members can manage the LLC themselves or hire a management team to handle business contracts and day-to-day operations. Most states, including New York, require members to explain their management structure in their Articles of Organization document.
Corporations
The owners of a corporation are called shareholders. Small corporations are limited to 100 domestic shareholders. These corporations can only be owned by individuals, estates, and certain trusts (not other corporations, LLCs, or partnerships). The ownership percentage is proportional to the number of stocks they own. Income, losses, and credit items are distributed proportionally based on the number of shares owned.
Unlike LLCs, it is relatively easy for corporations to transfer ownership or authorize additional shares to their owners
Pros and cons of LLCs and Corporations
LLC pros:
• Limited liability protection for your personal assets
• No double taxation
• Management flexibility
• Easier to create and operate than a corporation
LLC cons:
• Harder to transfer ownership
• Profits subject to Social Security and Medicare taxation
• Fewer fringe benefits – these must be treated as taxable income
Corporation pros:
• Limited liability and perpetual existence (if the shareholder passes away, the corporation continues to exist)
• No self-employment tax to worry about
• Only subject to pass-through taxation – one of the most valuable benefits of being an S corp
• Losses can be written off on your personal tax return
Corporation cons:
• Limited ownership options and growth potential
• Must pay a reasonable wage to employee-shareholders (the IRS tends to scrutinize this)
• Must pay payroll tax to make up for no self-employment tax
• Compliance costs can be high
We can help you choose the appropriate business structure, make the filing process as smooth as possible, and ensure that all the necessary requirements are met.
Call (631) 585-9698 for a free consultation to determine how we can best serve you and your business–contact us today.