Starting your own business can be a daunting task. And one of the first decisions you’ll have to make is deciding whether or not you should form an LLC or a corporation. When you incorporate or become an LLC, you rid yourself of personal liability (provided that you maintain your entity in good standing and properly separate your personal and business activities). While attorneys often have a preference for one over the other, theoretically, both an LLC and a corporation provide the same liability protection to owners. Curious which one is right for you? Read on to see some of the advantages of each entity.
Advantages of an LLC
The members and managers of an LLC are not required to keep corporate minutes,and there are no restrictions on the type of members an LLC can have. The main benefit of an LLC from a tax perspective is the ability to choose how you’d like to be taxed. If there’s one member of the LLC (a single owner), then the default tax treatment is sole proprietorship tax which is reported on a schedule C as part of the owner’s personal tax return. If there is more than one owner, then the default tax treatment is partnership tax. But, an LLC can elect to be taxed as a corporation, either an S corp or C corp if desired. It’s always nice to have choices. Keep in mind though, that you only get to choose how you want to be taxed once.
Advantages of a Corporation
Some attorneys prefer a corporation over an LLC for liability protection because corporate law is well established. There are many years of Federal case law and precedent to rely on, which is not the case with LLCs that are governed by each state. (Attorneys often prefer to use LLCs for real estate holdings since that’s what they were originally designed for.) From a tax perspective, a corporation offers two choices for taxation: C corp or S corp, (which is usually adequate).
In summary, before you decide which type of entity you should establish, you should carefully consider the desired tax treatment and make sure that the ownership works – there are restrictions on the number and type of shareholders for an S corp.
Need some help with your tax problems and planning? The Harding Group has the professionals you’re looking for!
If you can’t seem to decide whether or not you should become an LLC or a corporation, trust the professionals at the Harding Group. Unlike other accounting firms, we never charge you for emails or phone calls and strive for open communication with our clients. Whether you are interested in business advising, tax preparation, bookkeeping and accounting, payroll services, Training + support for QuickBooks, or retirement planning, we have the expertise and years of experience to help. If you are ready to take the stress out of taxes, contact us online or give us a call at (410) 573-9991 for a free consultation. For more tax tips, follow us on Facebook, Twitter, Google+, YouTube, and LinkedIn.