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An association, corporation, partnership, proprietorship, trust, or individual that has legal standing in the eyes of the law. A legal entity has legal
capacity to enter into agreements or contracts, assume obligations,
incur and pay debts, sue and be sued in its own right, and to be held
responsible for its actions.
When setting up a new company two options are to incorporate and set up a
corporation (Inc.) or to set up a limited liability company (LLC). Both
provide the benefit of personal liability protection, where your
personal assets are protected from claims against the corporation. This
is a major benefit as if the company fails or happens to be sued you
will not end up also losing your personal assets. There are, however,
significant differences between the two but we are here to help guide through the differences.
Inc. Incorporating is the most widespread approach when setting
up a business and wanting to protect your personal assets. Key
advantages when it comes to incorporating include:- Minimize Taxes -
Depending on the income your business generates you can potentially
keep business income and personal income (taken through salary) in lower
tax brackets. Splitting income in this way can minimize your overall
tax burden.
- Widespread Acceptance - As LLC's are a
relatively new concept it can sometimes be difficult to obtain funding
or access to certain vendors who prefer to deal with corporations.
- Going Public -
An LLC cannot be publicly traded and as a result any company looking to
grow and eventually either go public or be acquired by a venture
capitalist will need to be a corporation.
- Extra Taxes -
Corporate income is not subject to Social Security or Medicare taxes,
whereas an LLC being structured as a personal income flow through will
see income subject to these taxes.
- Additional Benefits -
When you have a C corporation you can pay yourself certain benefits
like life insurance and parking without being subject to personal tax on
the benefit. With an S corporation, LLC, or sole proprietorship these
fringe benefits are taxable for anyone holding more than 2% of the
business.
LLC Limited Liability Companies are becoming more and more
common and for those not seeking to eventually go public they can be the
best way to go. Key advantages when it comes to setting up an LLC
include:- Filing Requirements - Corporations are required
to file a fair amount of ongoing 'admin' paper work related to articles
of incorporation, holding and recording director and shareholder
meetings, and holding shareholder votes on major decisions (even if
there are only 2-3 shareholders). All this needs to be documented and
recorded and can be cumbersome for business owners. An LLC doesn't need
to do any of this.
- Single Taxation - An LLC is a flow through entity for tax
purposes and doesn't pay taxes on its own behalf. All income flows
through to the owners who record income on their personal tax returns.
- Ownership Flexibility
- LLC's have more flexibility in terms of who can own them,
particularly when compared to S corporations that have extensive limits
on the number of owners and where they can reside.
- Deductibility of Expenses
- LLC losses can be deducted against your other regular income when
they are incurred. This cannot be done in corporate business structures.
Inc. vs. LLC Determining how you want to structure your company
should be influenced by where you see the company going and what your
ultimate goals are. If you're planning on going public, having
operations across many states, or having significant income to manage
and split, you are likely to want to incorporate. If you're planning on a
smaller scale where your main focus is on effectively protecting your
personal assets for the minimum work required, then an LLC is likely
your best alternative. Many small service providers and businesses are
adopting the LLC model and the popularity of this form of business is
expected to grow significantly over the coming years.
Please note that the fee's listed DO NOT include your States filing fee.
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