Choosing the Right company type for your Business
One of the most important aspects of any business is the legal structure. The operational aspect, the management, taxation, paperwork, capital, and annual maintenance requirements are all dependent on the legal structure. It is hence recommended to always weigh the pros and cons of a legal structure and choose a company type that provides maximum benefits.
What is an LLC?
One of the most popular business structures in the US is a limited liability company (LLC). Entrepreneurs opt to form an LLC as it is a type of hybrid entity that combines the various characteristics of a partnership with those of corporations. There are a variety of limited liability companies that you can form in the USA and they are:
- Single-Member LLC or Sole Proprietorship
- Member -Managed LLC or Manager – Managed LLC
- Series LLC
- Family Limited Partnerships
- L3C Company
- Restricted LLCs
- Anonymous LLC
The process and documentation to form an LLC online as well as the type of LLC will vary from one state to another.
Benefits of forming an LLC
The regulation of a limited liability company can vary from one state to another although the benefits are almost the same. When you form an LLC apart from the benefits of the structure, you may also enjoy certain state benefits like business incentives. The most common advantages are:
- Limited Liability Protection – One of the greatest benefits to form an LLC online is limited liability protection. As the name suggests, if your company goes into debt or there is a lawsuit then as the owner, your personal assets will be protected.
- Pass-Through Taxation – This is a type of tax structure that makes any LLC the first choice among entrepreneurs. Pass-through taxation allows the tax to flow through from the company to the members and owners of the company thus mitigating double taxation.
- Less Documentation and Management Flexibility – It is easier to form an LLC as compared to other forms of business as there is less paperwork involved. A limited liability company doesn’t have a formal structure or fixed management structure and hence owners have a choice when it comes to operating the business and decision-making.
What is a Corporation?
A traditional corporation or a C corporation is a type of legal entity that is considered to be distinct and separate from its owners. Sometimes, it is referred to as a legal person because it has similar rights e.g., a corporation can enter into contracts, borrow money, own assets, hire employees, and pay taxes. If a group of shareholders incorporates a business then a corporation is created. You can register a corporation online or by mail depending on the chosen state or jurisdiction. The different types of corporations that you can form in the US are:
Benefits of Forming a Corporation
Entrepreneurs prefer to register a corporation as it has several advantages over other business structures. Depending on the state where you incorporate, there are several state-based benefits, incentives, and tax credit programs that your company can become a part of. The top benefits of forming a corporation are:
- Limited Liability – A major reason for entrepreneurs to register a corporation is limited liability. This simply means that at any given point in time, lenders or creditors will have no claim whatsoever on the personal assets of company owners.
- Availability of Capital – When you register a corporation online, one of the major benefits is that venture capitalists and other private investors prefer a corp over other forms of business. A corporation can also raise capital through shares or stocks.
- Perpetual Existence – Normally, the owners of a corporation are its shareholders or stockholders and such a company is managed by a board of directors. The death or inability to manage or run a corporation doesn’t affect its operations and the company will continue as a legal entity until it is liquidated or the charter is changed.
Comparison of the two company types – LLC vs Corporation
When it comes down to choosing the right business entity, should you incorporate a business or form an LLC online? It is quite a difficult choice because both LLCs and corporations are popular forms of business. It is important to note that LLCs and corporations are similar in certain ways and different from each other as well. A comparison of the two entities will provide more insight and help you to make an informed decision.
- Limit liability – Whether you form an LLC or establish a corporation, both forms of businesses will help in limiting the liability of owners, investors, and shareholders from debts and lawsuits against the entity.
- Owners – An LLC can be formed by a single individual or several partners known as members. When you incorporate a business, depending on the state, you can form a single-owner corporation also known as a single shareholder corporation although it is quite rare. You will still be required to appoint a board of directors.
- Formation – The formation process is different for both forms of businesses. In some states, you can form an LLC online or incorporate online while in other states you may have to submit in person or by mail. LLCs are formed by submitting Articles of Organization or Certificate of Organization while corporations are formed by submitting Articles of Incorporation or Certificate of Incorporation.
- Operating document – LLCs and corporations are required to have a document that stipulates the ways each type of entity will operate. If you register a corporation online then you will need to create bylaws while LLCs will need to create an Operating Agreement.
- Profits and Losses – The profits and losses of either entity are handled differently. In an LLC, the profits and losses pass through to the members or owners. In a corporation, the profits and losses are held by the entity.