When starting a new business there are many things to take care of and decisions to make. One of the most important decisions, but sometimes overlooked, is which type of business entity to use for your business. The two most common business entities are corporations (“INCs”) and limited liability companies (“LLCs”). When choosing the best business entity for your business, it can be overwhelming distinguishing between the two, but understanding the similarities and the differences can help you select the one that best fits your business needs.
Similarities
Both INCs and LLCs are creatures of state law, and both have legal ‘personhood’. As such, both INCs and LLCs shield their owners from being personally liable for the debts and liabilities of the business.
Key Differences
Ownership: Ownership in an INC is represented by shares, and owners are called shareholders. Ownership in an LLC is represented by a membership interest and owners are called members. Typically, shares are easy to transfer between parties, and its generally easy to create new shares. However, there is generally a great deal of restriction on the transfer of membership interests, and it can be extremely difficult to create new membership interests.
Management: INCs essentially have one type of management structure. Each year the shareholders elect the Board of Directors (“BOD”), and the BOD controls the day-to-day operations. On the other hand, LLCs are much more flexible. Members can jointly run the day-to-day operations, some members can have decision making authority over some aspects of the business while other members have decision making person over other aspects. Members can annually select a manager(s) to run the operations (just like an INC.), the members can appoint a manger(s) who will serve until a specific event happens, or whatever other option that works best for the needs of the business.
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, on the other hand, do not have any of these requirements.
Taxation: INCs offer two types of tax treatment. The default tax treatment, known as C-Corp (because it is in Subchapter C of the tax code), requires that the INC pay taxes on its income and then the shareholders pay taxes on the dividends they receive from the INC. This is often referred to as double taxation, because both the INC and the owners pay taxes. INCs that are eligible can 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 passes through to the owners. LLCs can elect to be taxed as a C-Corp or S-Corp, but also have the option of being taxed as a partnership, giving the owners more flexibility in tax planning.
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 get your business off on the right foot.
Ser & Associates regularly assists clients in forming and structuring their new business and can assist you in choosing which entity is most appropriate for you and your business. 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.
