Difficult times, like the ones we find ourselves in, create entrepreneurs. Many people are currently taking the leap and starting their own business. An important step in doing so, is choosing the right business entity.
The two most common types of business entities are corporations (“INCs”) and limited liability companies (“LLC”). When choosing the best business entity for your particular business, it can be overwhelming to understand the similarities and the differences between the two, but understanding these similarities and the differences is important in selecting the one that best fits the needs of your business. Here is an overview of the similarities and differences between INCs and LLCs.
Both INCs and LLCs are creatures of state law, and both are treated as a person. Also, both INCs and LLCs shield their owners from being personally liable for the liabilities of the business.
Ownership: Ownership in an INC is represented by shares; owners are called shareholders. Ownership in an LLC is represented by a membership interest; owners are called members. Shares are easy to transfer between parties, and its generally easy to create new shares, while there is a great deal of restriction on the transfer of membership interest, and it can be extremely difficult to create new membership interest.
Management: INCs. essentially have one type of management structure. Each year the shareholders elect the Board of Directors (“BOD”), and the BOD control the day to day operations. On the other hand, LLCs are much more flexible. Members can run the day to day operations, or the members can select a manager(s) to run the operations.
Formalities: INCs are required to follow certain formalities. There must be an annual shareholders meeting, an annual meeting of the BOD, and minutes kept for every meeting. In fact, every action an INC takes must be properly approved by the BOD in accordance with the bylaws. Failing to follow these formalities can invalidate the INC’s actions. LLCs do not have any of these requirements.
Taxation: INCs offer two types of tax treatment. The default tax treatment, often referred to as C-Corp (because it is in subchapter C of the tax code), requires that the INC pay taxes on its income and that shareholders pay taxes on the dividends they receive from the INC. This is often referred to as double taxation. INCs that are eligible can also elect to be taxed under Subchapter S of the tax code, often referred to as S-Corp. Here the INC does not pay taxes, instead all the tax liability is passed through to the owners. LLCs can also elect to be taxed as a C-Corp, S-Corp, but have the additional option of being taxed as a partnership.
Both INCs and LLCs offer protections to their owners, but each has advantages and disadvantages. The LLC is generally more flexible for operations, management, and taxation, whereas the INC is typically the preferable vehicle for growing the business by raising capital. Taking the time to evaluate which business entity is best for your business will start your business on the right foot.
Ser & Associates can help you work your way through the options for your business entity and assist you in choosing the one most appropriate for you and your needs. Please feel free to contact us today at 305.222.7282. Also, please be sure to visit us at www.Ser-Associates.com and follow us on Instagram, Facebook, and/or LinkedIn.