Great You’ve got a good idea for a new business, and you’re ready to launch and become an entrepreneur. But you have questions about whether you should incorporate or set up an LLC, limited liability company for your legal business structure. You may be asking yourself, which is better an LLC vs Corporations?
This article will review the differences between LLC vs. incorporating into a corporation, the different types of corporations S – corp or C – corp, and how limited liability companies LLC compare two sole proprietorships, known as DBA or doing business as and their comparisons to business partnerships.
There’s a lot of information, and it can become overwhelming for beginning entrepreneurs. Read on and find out which business structure is right for your new small business.
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What is Incorporation?
When you set up a Corporation, you are taking your business from a single owner, such as yourself, as a sole proprietor of the legally recognized company in the US state in which you incorporate.
Now your business is a separate legal business entity onto itself. It is separate from you, and your partners, the people who founded the firm.
There are two popular types of corporations used for small businesses they are an S corporation (S-Corp) and a C corporation (C-Corp)
By incorporating your business, you will gain certain advantages such as the most important to protect you and your family from personal liability for business debts, lawsuits, and legal judgments. Additionally, you enjoy greater business credibility with suppliers, industry professionals, and your customers.
What is an LLC Limited Liability
If you opt to set up a limited liability company, often referred to with the initials LLC, it is a form of private company with limited responsibility for its partners and owners. It combines the advantages of pass-through taxation that business partnerships and sole proprietors do and includes the limitations of responsibility that incorporation offers.
LLC vs Corporations: Which is Better?
Which is better for your specific business situation can only be answered by professional attorneys such as those at LegalZoom which we highly recommend
There are general advantages for each type of business structure:
Protection of Personal Assets
The main purpose of an LLC is to protect you the business owner, and your partners and investors which are named as members of the company, from being held personally liable for any of the business actions, whether debts or lawsuit judgments of the limited liability company. For example, if your company was sued and a legal judgment was issued your personal assets, such as your home, children’s college fund, and retirement savings accounts would be protected from your creditor’s collections to satisfy the legal judgment.
Many entrepreneurs opt for LLC set up for their new businesses because of the flexible management requirements, as opposed corporations which have very formal and sometimes burdensome requirements. Corporations have a Board of Directors which oversee the officers, including you business owner, actions why LLCs do not have the same restrictive oversight.
Limited liability companies are not taxed as a business, instead, the income is taxed at the member’s taxation rate. This type of pass-through taxation is attractive to investors who want to use the income loss to reduce their personal tax return payments.
Corporations have many advantages dependent upon the type of Corporation whether it’s an S corporation or C Corporation to both business owners and to the company.
S corporations offer the important passed through taxation feature, just like LLCs.
C corporations businesses are taxed as separate entities, which could result in double taxation and increased payments to the IRS. This is the reason why many small businesses do not opt for the C Corporation and instead choose the S corporation instead.
C corporations will be taxed on their business profits burst at the corporate level and then the owners who receive income in the form of dividends on their Corporation shares are taxed again on their personal tax returns.
LLC or INC for Startup
The two main differences between an LLC or Corporation are the taxation and management features described above. There are also other key differences which include
Business owners like the advantage of S corporations, especially during the lean startup years, which will often be years of loss, which reduce the personal tax responsibility of the entrepreneur.
S corporations provide significant savings on taxes for employment such as Social Security, Medicare, self-employment taxes. Additionally, allows you the business owner to mitigate your income from other sources with losses from your startup business. See corporations do not allow for this tax savings.
see corporations and LLC limited liability companies have no restriction on the number of owners, members that your business can have. However, S corporations do have restrictions to no more than 100 members and these members cannot be nonresident aliens. Also, S corporations cannot be owned by other business entities such as C corporations, LLC, and trusts that do not qualify.
VC venture capitalists
C corporations are often recommended for startup businesses that seek VC funding from venture capitalists. Due to the ability of C corporations to issue different types of stock, including preferred and common stock, allowing for flexibility of funding and equity assignment. Venture capitalists can attract investors interested in your business for the future profits of healthy dividends on stock purchases.
C corporations can accumulate earnings annually and retain them within the company and not be required yearly to distribute earnings outside of the firm.
What is the difference between an LLC and a DBA?
The letters are abbreviations of the full legal term – LLC is Limited Liability Company and DBA means Doing Business As. They are both legal entities to “hold” businesses.
DBA Doing Business As: Definition
Your DBA is not a legal name for your business it is the name you use on your trucks, and website, ie your company brand name that you display to your customers. Sometimes it is called a trade name, fictitious or assumed name, thus the “doing business as” title. US states have different laws regarding how to register your DBA. Registration of a DBA before opening your business to customers is mandatory in the states of California, Florida, and Connecticut.
LLC Limited Liability Company: Definition
As detailed above, an LLC is a business structure which “limits”, thus the word limited in its title, the risk exposure and responsibility of the owners, referred to as members. It offers much great protection for an entrepreneur’s personal assets than a DBA does, thus it is recommended to set up an LLC with Legalzoom as we reviewed