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Forming LLCs vs. Corporations

Published July 12, 2010

When setting up your business, you should choose your structure carefully, as whichever structure you choose will have profound implications for taxes, regulatory restrictions, finance considerations, and other legal issues. Two of the most common business structures are corporations and LLCs.

Corporations are considered legal entities of their own, separate from the business owner who establishes them.  Because of this separation of owner and business, a corporation provides what is called a corporate veil.  This means that all of the business owner’s personal assets are protected from lawsuits and are separate from the business.

If you wish to form a business that is rigidly structured, a corporation may be right for you.  Inherent in the corporate business form is an established power and management structure, consisting of directors, officers, and shareholders.  Each group has its own set of clearly defined roles and responsibilities within the company’s framework.  As such, it can be time-consuming to go through the incorporation process, as setting up this structure requires that a number of different documents be filed.

One drawback of forming a corporation is that profits may be double taxed. That is, the corporation itself will be taxed for any profits earned, and any individual stockholder who earned profits from the corporation in the form of paid dividends will also be taxed.

Generally, LLC members are protected from personal liability for debts and claims of the business.  This means that if the business can’t pay a creditor or gets sued, the creditor can’t legally come after the members’ personal assets.  In addition, LLCs can provide tax benefits, as they are often taxed like partnerships.  You can, however, choose to have your LLC taxed like a corporation, or you can choose to have it taxed as a pass through entity.  This is how partnerships are taxed, with the LLC’s income and losses being reported on each individual’s tax returns.

Another benefit of choosing to form an LLC is that LLCs require less maintenance than corporations.  They do not have such formal corporate requirements as annual meetings or corporate bylaws.  As such, an LLC can provide a great deal of flexibility when it comes to organization and management issues.  Owners can be individuals, trusts, partnerships, corporations, LLCs, and even foreign individuals, and there are no requirements to have officers.

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