Small Business Q&A: Corporation or LLC?

Small Business Q&A: Corporation or LLC?

What is the Difference between an LLC and a Corporation?

Both a corporation and an LLC are business entities that are very advantageous for small businesses.   A corporation has shareholders, directors, and officers, while an LLC has members, and possibly a manager.  Corporations have a bit more formality and structure to them, and can be slightly more involved to manage, requiring annual corporate meetings.

Why do People form LLCs and Corporations?

LLCs and corporations are formed by businesses and individuals to limit the potential liability of the business venture.  Both corporations and LLCs are considered to be separate individuals distinct from the owners under the law, as long as they are established, financed, and documented correctly, and managed properly.  A person conducting business without any such protection is essentially putting the great majority of his or her assets at risk in the event of a serious accident or contractual liability.  Creating a corporation or LLC generally limits the risk to the assets and insurance of the corporation or LLC.

Which is Better, an LLC or a Corporation?

It depends on your business structure, income, and goals.  Your CPA or income tax adviser can advise you which of the two is most advantageous from a tax and growth perspective.

Do I Need Other Investors to Form a Corporation or LLC?

Absolutely not.  An individual may form either entity, and in most circumstances have a “pass through” on income taxes so that the taxpayer is not taxed twice.  In Idaho, as in other community property states, a married couple is considered a “single taxpayer” by the IRS, and generally has the same “pass through” advantage.

What are Some Pitfalls to Corporations and LLCs?

Both an LLC and corporation must be properly capitalized,  and not a “shell” to avoid liability.  In the case of a corporation, annual meetings must be held, no matter how few shareholders, even if there is only one.  Both LLCs and corporations must be properly organized and should be properly documented with by-laws in the case of a corporation, and an operating agreement for an LLC.  A common mistake is when there are multiple members or shareholders, and the original documentation lacks buyout provisions, which can lead to disputes and litigation.

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