One of the main reasons to form a corporation or LLC for a small business is to avoid personal liability for the business’ debts. In an LLC the members can decide whether they want to be a pass-through entity or be taxed as a C corporation. LLC stands for Limited Liability Company. Other corporation types that are available in the United States, but not in Canada include C-Corporations and S-Corporations. As you will see, there are similarities and differences between corporations and LLCs. However, the LLC’s operating agreement can override the state default by specifying that it be manager-managed. Recordkeeping is a fundamental requirement for both LLCs and corporations. Shareholders own the corporation, but they only have limited governance rights. The Articles of Incorporation and Articles of Organization are public documents. What's more, profits and losses can be allocated differently if that is what the operating agreement provides. Includes 6 months free registered agent service. How do you decide which entity type is the right one for your business? If you choose to incorporate a business, you move from a sole proprietorship or general partnership into a company that's recognized by a state of incorporation. A corporation pays its shareholders dividends from its after-tax income. There are a number of factors the courts will look at including whether the corporation or LLC was undercapitalized, if the shareholders or members used the business’ asset for personal purposes and whether there was a failure to follow compliance requirements. Both LLCs and corporations involve properly completing and filing your documents with the state, appointing a registered agent, and fulfilling ongoing requirements. In terms of ownership, shareholders and members have both financial rights and management rights. Say you own a flower shop. Single-member LLCs are taxed as sole proprietorships, while multimember LLCs are taxed as partnerships. As always, you should talk to a trusted legal and tax advisor before making a final decision. However, for many businesses, this might not be the case. Service of process is the delivery of court documents, in particular the summons that tells your company it’s being sued and by whom, the reason why and for how much. In some circumstances, LLC owners can earn a substantially increased tax bill through the addition of the self-employment tax, currently at 15.3 percent. Allocation of profits and losses depend on the type of corporation. Protecting business owners from being personally liable for the actions of the business. Although an LLC can have passive members too, people who chose to invest in an LLC instead of a corporation may want to have a say in how the business is run. In fact, many venture capitalists not only prefer to invest in a corporation, but their governing documents don’t let them invest in LLCs. This means that it pays corporate income tax on its income, after offsetting income with losses, deductions, and credits. Corporations can also issue different types of stock interests. All rights reserved. UpCounsel accepts only the top 5 percent of lawyers to its site. However, sometimes the entity may also need protection from the debts and liabilities of its owners. “LLC or Inc.?” When it comes to choosing the best structure for your business there is no single, one-size-fits-all answer. In an LLC, the members themselves decide how the LLC will be managed. Then, if the corporation distributes its profits to the shareholders, say in the form of a dividend, that is income to the shareholders which they have to report on their personal income tax return. But if the members want to be passive investors and have the business run by managers with more expertise than they have, and want the extra protections provided by the corporation statutes, then Inc. beats LLC. In other words, it becomes a legal business entity of its own—separate from the individuals who founded it and the shareholders who will own it over the course of its existence. LLC stands for “limited liability company". Conventional wisdom touts the LLC as the tax-preferred entity type. taxation implications of LLCs and corporations. But that doesn’t mean they can never be liable for anything. If the business is in collections from creditors or is being sued, your personal assets, such as your house or car, are protected. LLCs are technically formed, while corporations (S corporation or C corporation) are incorporated. That document is often called Articles of Incorporation for a corporation or Articles of Organization for an LLC. These include the right to elect the board of directors, to remove directors under certain circumstances, and to vote on fundamental transactions that affect their economic, ownership rights such as mergers, asset sales, and dissolution. Many LLC statutes just leave it up to the members to provide in their operating agreement for how they will be managed. When you incorporate a business, you evolve from a sole proprietorship (if you are the sole owner) or general partnership (if you have no owners) into a company that’s formally recognized by its state of incorporation. If you do nothing, your LLC will be taxed as a partnership under Subchapter K of the Internal Revenue Code. Wherever and however you do business, CT Corporation acts as an extension of your business and helps you stay compliant. Enabling tax and accounting professionals and businesses of all sizes drive productivity, navigate change, and deliver better outcomes. And owners can be liable for certain activities if there’s a statute that imposes liability on them. And in the match of LLC vs Inc, taxation is almost never a draw. When you incorporate, your corporation, by default, will be taxed under Subchapter C. Your corporation is a separate taxable entity with the business’ profits and losses taxable to the corporation, not to the owners. The financial rights include the right to share in the profits through dividends and through distributions upon the company’s dissolution. What are the differences between an LLC and an Inc.? Considering your priorities with the four factors listed above can help you determine which entity structure is best for your business. Forming corporations and LLCs require paperwork with your state. Hire the top business lawyers and save up to 60% on legal fees. However, for many businesses, this might not be the case. LLCs have pass-through taxation without ownership restrictions. But a member’s creditor cannot touch the member’s ownership in the LLC or become a member with management rights. The shareholders do not have a say. LLC's are very common in the United States, but are not available for registration as a corporate legal entity in Canada. Incorporation Wizard Compare Business Types. /Feature/WoltersKluwer/OneWeb/SearchHeader/Search, The world’s most trusted medical research platform, Cloud-based tax preparation and compliance, workflow management and audit solution, Integrated tax, accounting and audit, and workflow software tools, One central hub for all your firm’s engagements, Suite of solutions with detailed and accurate corporate action taxability, Integrated regulatory compliance and reporting solution suite, Enabling a holistic and proactive approach to lien portfolio management, On-demand management service for all entity compliance documents, Track regulatory changes across a list of global agencies. It defines the business relationship and deals with issues of: A limited liability company has various benefits, including: Businesses tend to have abbreviations like LLC or Inc., but what do they mean? LLCs: Similarly, when you form an LLC, you are forming a company with its own legal existence—separate from its founders and members (as the owners of LLCs are called).