Corporation or LCC-which is best for me?
At some point during the business start-up process, a you will need to decide how to structure the business. There can be many ways to do this, but it is generally done in the form of a corporation or an LLC (limited liability company).
Before you can decide which is right for you and your business, take a look at some of the pros and cons of each:
There are two types of corporations - S Corporations and C Corporations. Basically, the income of an S corporation is not taxed under federal tax laws, whereas an S corporation is. There are a number of advantages to registering a business as a corporation, which include:
- Income shifting. Income shifting occurs when the total income of the corporation is divided equally among the members of the corporation. This is one of the most advantageous reasons for incorporating a business. As a result of income shifting, the total tax required is much lower than it would be otherwise - only about 15%.
- Small business tax deduction. Once a business is incorporated, a small business tax deduction equal to 16% of the first $200,000 in income can be filed.
- Fringe benefits. When a business incorporates, it can offer more fringe benefits to it employees, which then allows the company to get larger tax deductions on benefits like medical, dental, and retirement plans than they otherwise would.
- Income delegation. This allows the business owner to declare when income is received personally as opposed to income received towards the business, resulting in lower taxes.
- Self Employment tax benefits. With a corporation, only earnings that have been paid to an owner for his or her services can be taxed. Whatever money is left in the business for reinvestment or distributed to the shareholder is not subject to payroll taxes or self-employment tax.
There are, however, drawbacks to a corporation. Both S and C corporations require more paperwork than an LLC and are required to file articles of incorporation, hold directors' and shareholders' meetings, keep corporate minutes, and hold shareholder votes on major corporate decisions, which are not required of LLC's.
An LLC, or limited liability corporation, allows business owners to separate their personal identity and financial assets from that of their business. When a company is not incorporated, creditors or partnerships can seize the business owners' personal assets, such as homes, savings, or cars. However, when a business is incorporated as an LLC, only the money put into the business can be seized or lost in the event the business tanks or cannot support itself financially.
There are also drawbacks to LLCs. For one, the tax liability for an LLC is different with each state. If your company will be operating in different states, you will have to know how that state handles LLCs before deciding on an LLC. In addition, an LLC is unable to ever go public. If you are an LLC and eventually want to go public, you will have to switch to a corporation.
There are advantages and disadvantages to both corporations as well as LLCs. To determine which is right for your business, it's important to sit down and discuss the pros and cons of each with your attorney, mentor, or advisor.