Deciding Which Business Structure is Right for your Business: LLC or Corporation
Hurray, you have a name for your new business. After hours of agony, research, and sharing with family and friends you have finally come up with a name. So now the next step on your business start up checklist is navigating through incorporation. But wait you hit a road block! You know as a new business owner you want to introduce your venture to the world the right way but maybe a little confused on the next step.
You have decided that you want your business to be an incorporated entity, but you are unsure if you should form an LLC or a Corporation.
Great news, we are here to help you figure it all out. This is one of the most important decisions that you can make as a business owner and once you decide to start a business you want to ensure that you have everything in place for success.
A few key factors to take into consideration when deciding which is right for you are:
- Tax benefits
- Amount of paperwork you want to deal with on an annual basis
- Personal liability
- How you wish to raise capital
Regardless of the type that you choose going from being a sole proprietor to an established business entity has many benefits:
Asset Protection – The foremost advantage to either forming a corporation or LLC is asset protection. Once you create a business entity for your business your personal assets are separated from your business assets and you are no longer co-mingling them together. What this means is that if there is ever any litigation and you find yourself in court being sued than in most cases your personal assets are protected this includes your home, car, personal bank accounts.
Name Protection – As we have discussed in our March blog protecting your business name is a crucial step in brand recognition. But this is also a benefit to incorporating a business. When you become incorporated your business name is protected at the state level.
Credibility – As you set out to sell your products and services to the world presenting yourself as a credible legitimate enterprise will be paramount. Credibility is especially important to potential clients, investors, business partners, and vendors. This will also be a key aspect as you seek funding for your business. You will need credibility as you pursue business loans, grants, and other forms of financing.
Tax Benefits – Whether you decide to form a corporation or an LLC there will be tax benefits afforded to you that sole proprietors do not receive. However, consult with a tax professional to fully understand the tax implications of both.
LLC or Corporation?
Limited Liability Company
The simplest form of business entity is an LLC. An LLC provides you with protection of a corporation while affording you with the tax benefits of a sole proprietorship or partnership of two or more individuals. An LLC is created by filing Articles of Organization or a Certificate of Formation with the Secretary of State in your state and pay the appropriate fees.
Under this type of entity the owners of the LLC are called members. If there is more than one member, a managing member must be appointed. An operating agreement must be created between the members and company manager that outlines the management of the company, ownership of the company, and any other operating principles.
An LLC is considered a less formal type of entity because it is not required to hold and annual meeting or maintain minutes or bylaws.
There are some states that have additional publishing requirements once the LLC has been formed. Those states include: Arizona, Georgia, Pennsylvania, Nebraska, and New York. For example if you form an LLC in Arizona you will be required to publish a notice announcing the creation of the LLC there.
Corporation is a more formal type of business entity. A corporation is created by filing either Articles of Incorporation or a Certificate of Incorporation with the Secretary of State within your state.
A corporation is governed by a board of directors who appoint the officers so that they can manage the company. Corporate ownership is determined by shareholders who own shares of stock. When the corporation is created you must decided how many authorized shares of stock the corporation will have. Shares of stock can be sold to raise capital for the corporation.
A corporation is considered to be a more formal type of business entity because an annual meeting must be held and reflected in official corporation minutes and bylaws.
Now that you know the differences you can form the type of entity that is right for your business. To obtain more guidance through the incorporation process visit us at cbadirect, or give us a call. We will walk you through the process. We can start by checking the business name you have chose to ensure it is available.
Which one do you prefer an LLC or Corporation?
We’d love to hear from you. Leave us a comment below.