I’m on a mission to help entrepreneurs understand that they need to choose an appropriate business structure when they start a business. Doing so separates them personally from the business, and protects their assets. But the top question I get is: which business structure should I choose? The LLC or corporation? If I’m honest, I feel about those two business structures the way parents feel about their children: I simply can’t pick a favorite. Each has benefits for businesses, but ultimately, it’s up to you which makes more sense for your company. The least I can do is educate you on each business structure so you can make an informed decision.
What the Two Have in Common
First, let me say that the LLC and corporation — particularly the S corp — have a lot of great features in common. Both create legal entities for your business that are separate from you personally. As long as you continue to operate as a sole proprietor (that is: you never applied for a formal business structure), you and your business are essentially the same. Should your business ever be sued, guess where that money will come from if your company can’t pay it? That’s right: your personal assets.
But the LLC and corporation protect your assets by separating from you. So in that case of a lawsuit, if the company doesn’t have the funds, your assets are safe.
The LLC and S corp both offer what’s called pass-through taxation. That means instead of having to file taxes twice — once for your personal taxes and again for your business, you only file once, on your personal taxes. That saves time and money.
What Makes the LLC Unique
The LLC is wonderful for many reasons. If you plan to have shareholders in your company, you’ll have fewer restrictions with the LLC: an LLC can be owned by other LLCs or corporations, but the owners don’t have to be U.S. citizens, the way they do with corporations. Also, there is no limit on how many shareholders an LLC can have. The S corporation is limited to 100 shareholders.
The LLC tends to be a little less formal in its yearly requirements than the corporation, which appeals to many. And there is an LLC for just about every situation, from real estate to professional services, so for many businesses, it just makes sense to file as an LLC.
Where the Corporation Really Shines
If you want to attract investors to your company, incorporating it is the best way to do so. Because there’s no personal risk to become a shareholder in a corporation (thanks to that separation of entities), investors are more drawn to corporations over other business structures.
Companies who choose to operate as an S corporation often have lower taxes than those operating as C corporations, which is money put back into your business!
Choosing the right business structure is a big decision, and one that shouldn’t be taken lightly. Whichever you choose, just make sure you do pick one, as it’s one of the smartest things you can do to protect both yourself and your brand.
