LLC vs Corp
Start your companyWhat is the difference between an LLC and a Corporation?
Both LLCs and corporations offer liability protection to their owners. LLCs are pass-through entities, which means profits and losses of the business are passed through to the owners and reported on their personal tax returns. Corporations are taxed as separate entities. They pay taxes on their profits and shareholders pay additional taxes on any dividends they receive.
Both LLCs and corporations offer liability protection to their owners. LLCs are pass-through entities, which means profits and losses of the business are passed through to the owners and reported on their personal tax returns. Corporations are taxed as separate entities. They pay taxes on their profits and shareholders pay additional taxes on any dividends they receive.
LLC
LLCs are the best entity type for companies with owners who seek:
Pass-through taxation by default
Flexible management structure
Ability to elect C-Corp and S-Corp taxation
No required formalities
Corporation
Corporations are the best entity type for companies with owners who seek:
Ability to elect pass-through taxation
Positive public perception
Ability to raise capital
Strict corporate formalities
LLC Advantages
Liability protection
Tax advantages
Simplicity
Tax planning options
Flexibility
Business loans
Benefits & Advantages
Liability protection
Tax advantages
Raising capital
Tax planning options
Public perception
Business loans
LLCs are the right entity for:
E-commerce & online businesses
The favorable tax options and easy upkeep of an LLC make it an attractive option for anyone wishing to operate an e-commerce or other online business in the US. Unlike corporations, LLCs do not have extensive formal requirements, such as annual shareholder meetings and boards of directors. As such, LLCs simplify company management and provide additional time to devote to your business.
Startup companies with few owners
An LLC offers the right combination of personal liability protection, pass through taxation, and business credibility desired by most startup businesses. Small business owners can use an LLC to gain access to business loans to scale their companies.
Service businesses including SaaS
Service-based business owners need liability protection to shield themselves from claims against the business by disgruntled customers. An LLC not only provides liability protection but also offers the ability to change the company’s taxation method to fit business needs.
Corporations are the right entity for:
Companies raising capital
The ability to issue unlimited shares to investors makes a corporation an attractive option for startup founders seeking to raise capital. Since most startups are not profitable for many years, the double taxation of a corporation should not necessarily increase a founder’s tax liability. However, if this is a concern, the shareholders can elect to be taxed as a pass-through S-Corp.
Companies joining incubators & accelerators
Sophisticated investors that participate in incubator and accelerator programs prefer to invest in corporations because they offer investors simplified taxation and corporate formalities that protect their investment. Since one of the big advantages of joining an incubator or accelerator is the access to a pool of investors and advisors, if you plan on joining such a program, you should consider forming a corporation.
Subsidiaries of foreign companies
Corporations pay a reduced corporate income tax rate on company profits. If you are forming a subsidiary in the US, you may want to keep US profits separate from foreign income. In such a case, the corporate taxes levied on a corporation may be beneficial over the pass-through taxation of other entity types.
LLC
Pros
Liability protection > An LLC shields your personal assets from your company’s debts and legal liabilities.
Simplicity > An LLC offers simplified maintenance requirements providing liability protection without the need for annual meetings, boards of directors, or officers.
Tax advantages > LLCs do not pay corporate income taxes. Instead, profits from an LLC are passed through to the owners directly, thereby reducing your tax liability.
Tax planning options > By allowing owners to elect to be taxed as an S-Corp, S-Corp, or pass-through entity, LLCs provide the most tax flexibility of all entity types.
Flexibility > An LLC can have one or more owners and can be managed by its owners or an appointed manager allowing you to tailor company management to your needs.
Business loans > An LLC allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “LLC” at the end, it lets customers and partners know you are a credible business.
Cons
Companies with many owners > Companies with many shareholders will be hindered by flexible management structure and minimal formal requirements of LLCs.
Raising capital > LLCs are not the right entity type for raising capital because investors do not favor the pass-through taxation and flexible structure of LLCs.
Corporation
Pros
Liability protection > A corporation shields your personal assets from your company’s debts and legal liabilities.
Public perception > Most well-known companies are corporations. Owning a corporation tells the public that you are serious about scaling your business.
Raising capital > Corporations have no limits on the amount of investors to whom they may issue shares. This is why corporations are the best entity type for raising capital.
Tax planning options > Owners of a corporation can elect S-Corp pass-through taxation which provides flexibility in tax planning and optimization.
Tax advantages > Corporations pay reduced corporate income tax rates on company profits which can help you optimize on taxes in certain circumstances.
Business loans > A corporation allows you to build your business credit history which will provide access to business loans that will help your company grow.
Business credibility > When your business name has the designation “Inc.” at the end, it lets customers and partners know you are a credible business.
Cons
Double taxation > Unless it qualifies as an S-Corp, your corporation will pay income taxes on its profits and then shareholders will pay income taxes again on dividends issued.
Strict formalities > Corporations are required to hold annual meetings, keep formal minutes of meetings, appoint a board of directors, and select officers.