One dilemma a new business faces is deciding the appropriate corporate entity. A number of factors play into this decision. Two of the most common corporate entities are a limited liability company and corporation. There are significant differences between the two.
A limited liability company (LLC) is considered a “pass through” entity. What that means is, an LLC is taxed as a partnership and income is reported on the owner’s personal income tax return. While an LLC is taxed as a partnership, the owners are not personally liable for the LLC’s debts or liabilities. LLCs may also distribute income and losses disproportionately to capital contributions or ownership percentages. A distinct advantage to an LLC is flexibility. LLCs are not required to hold annual director or shareholder meetings, keep minutes, maintain a stock registry, or have a board of directors. LLCs use managers to run the LLC in managing.
In contrast to an LLC, a corporation is an entity legally distinct from its shareholders. What that means is the income of the corporation is taxed, and the income distributed to shareholders is also tax. Many consider this a double taxation. Like LLCs, corporations enjoy the legal protection of the corporate veil. Shareholders are not liable for the corporation’s debts or liabilities. For startups, corporations tend to be preferred. In some cases, investors may require an LLC to amend or reincorporate as a corporation. Unlike an LLC, governance is much more formal. Corporations must hold annual shareholder and director meetings, keep minutes and resolutions, and observe other formalities.
Johnstun Law can help with both corporation and LLC registration. Learn more about LLC registration here.
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